Comments on: Here Comes the Roth 401(k) http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/ A premiere personal finance blog, established 2003. Within, Flexo discusses his own experiences with money, and he and other authors comment on a wide range of personal finance topics. Sat, 21 Nov 2009 16:42:00 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: kitty http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127611 kitty Wed, 12 Dec 2007 18:31:35 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127611 I run the calculator and it also came in favor of Roth. There seem to be a bug, however, unless I am missing something. They calculated the value of invested tax savings to be 0. Now tell me please, how the value of investing 28% of 15500 for 17 years is 0 after taxes? Even if I put this money under a pillow (0% growth) it would still be a nice chunk of money. This looks like a bug - no matter what amounts I put in, the value of invested tax savings always come at $0. Additionally there are some other factors that come in at certain incomes: 1. Your max 401K contribution may be the only thing that allows you to contribute to Roth as well e.g. if you earn slightly over 100K. Substract 15500 and you can contribute $4000 to Roth in addition to 401K. 2. Your max 401K contribution may be the only thing that allows you to avoid AMT. 3. Your max 401K contribution may keep you from hitting a whole lot of tax hits coming at higher incomes (but still within 28% tax bracket): itemized deduction limitation, higher state tax rate, etc. By the way, I don't see any consideration for the state tax. 4.Your max 401K contribution can keep your income below the line when funny things start to happen like itemized deduction limitation. I run the calculator and it also came in favor of Roth. There seem to be a bug, however, unless I am missing something. They calculated the value of invested tax savings to be 0. Now tell me please, how the value of investing 28% of 15500 for 17 years is 0 after taxes? Even if I put this money under a pillow (0% growth) it would still be a nice chunk of money. This looks like a bug – no matter what amounts I put in, the value of invested tax savings always come at $0.

Additionally there are some other factors that come in at certain incomes:
1. Your max 401K contribution may be the only thing that allows you to contribute to Roth as well e.g. if you earn slightly over 100K. Substract 15500 and you can contribute $4000 to Roth in addition to 401K.
2. Your max 401K contribution may be the only thing that allows you to avoid AMT.
3. Your max 401K contribution may keep you from hitting a whole lot of tax hits coming at higher incomes (but still within 28% tax bracket): itemized deduction limitation, higher state tax rate, etc. By the way, I don’t see any consideration for the state tax.
4.Your max 401K contribution can keep your income below the line when funny things start to happen like itemized deduction limitation.

]]> By: My Dollar Plan http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127266 My Dollar Plan Tue, 11 Dec 2007 14:38:12 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127266 Meg is right, the Roth 401ks were made permanent when the Pension Protection Act was signed in 2006. Count me in as jealous, wish I had a Roth 401k!! Flexo, are you saying that employer matching over 6% is included in the deferral limit? That's the first time I've read that anywhere. My company has matches up to 9% and I don't think I've ever been penalized for contributing the max. I'll have to look into that one. Meg is right, the Roth 401ks were made permanent when the Pension Protection Act was signed in 2006.

Count me in as jealous, wish I had a Roth 401k!!

Flexo, are you saying that employer matching over 6% is included in the deferral limit? That’s the first time I’ve read that anywhere. My company has matches up to 9% and I don’t think I’ve ever been penalized for contributing the max. I’ll have to look into that one.

]]> By: Patrick http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127212 Patrick Tue, 11 Dec 2007 11:44:22 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127212 Ohhh, I'm officially jealous! I would love to have toe Roth 401(k) at my company. I would probably put it all in there vs. the traditional just because I know that mentally, it would be a big benefit for me to know that I will be able to withdraw 100% of the funds without taxes when I retire. (assuming no changes to the tax laws repealing the Roth IRAs/401(k) plans). I also have just over 30 years before I would be able to withdraw the money, which would give me the most beneficial element of all - time. Nice calculator as well. The results for me were heavily in favor of using a Roth - even with the same tax rate. Again, I think this is because of the amount of time. Ohhh, I’m officially jealous! I would love to have toe Roth 401(k) at my company. I would probably put it all in there vs. the traditional just because I know that mentally, it would be a big benefit for me to know that I will be able to withdraw 100% of the funds without taxes when I retire. (assuming no changes to the tax laws repealing the Roth IRAs/401(k) plans). I also have just over 30 years before I would be able to withdraw the money, which would give me the most beneficial element of all – time.

Nice calculator as well. The results for me were heavily in favor of using a Roth – even with the same tax rate. Again, I think this is because of the amount of time.

]]> By: Meg http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127008 Meg Mon, 10 Dec 2007 22:35:43 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-127008 I could be wrong, but I think the Roth 401k has already been made "permanent" with legislation--which is why more and more companies are now paying to re-do their plans and offering them. In any event, I have one at my job and I LOVE it. It feels so good to know I'll retire with lots of tax-free savings to comfort me in my old age. I think it's best to contribute fully to Roth 401ks for many reasons (most experts--and calculators--agree that alomost everyone is better off using a Roth, even if you're making well into the 6 figures). Mainly though, I think everyone should take full advantage of a Roth when and while you can. You'll likely end up with lots of Traditional (i.e. taxable) retirement savings anyway since employer matches are tax-deferred, you might not always work somewhere that offers a Roth, and the government might not always allow Roths to exist. I could be wrong, but I think the Roth 401k has already been made “permanent” with legislation–which is why more and more companies are now paying to re-do their plans and offering them.

In any event, I have one at my job and I LOVE it. It feels so good to know I’ll retire with lots of tax-free savings to comfort me in my old age.

I think it’s best to contribute fully to Roth 401ks for many reasons (most experts–and calculators–agree that alomost everyone is better off using a Roth, even if you’re making well into the 6 figures).

Mainly though, I think everyone should take full advantage of a Roth when and while you can. You’ll likely end up with lots of Traditional (i.e. taxable) retirement savings anyway since employer matches are tax-deferred, you might not always work somewhere that offers a Roth, and the government might not always allow Roths to exist.

]]> By: Zook http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126972 Zook Mon, 10 Dec 2007 18:43:07 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126972 The cool thing with the 401k's [if your company has both options] is to have say 5% taken out as a Traditional 401k and say 3% deducted as Roth 401k. It can be done and it is housed in the same account. The cool thing with the 401k’s [if your company has both options] is to have say 5% taken out as a Traditional 401k and say 3% deducted as Roth 401k. It can be done and it is housed in the same account.

]]> By: Heidi http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126958 Heidi Mon, 10 Dec 2007 17:14:20 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126958 My employer also offers the Roth(k) and I have been doing some scenario planning as well. Thanks for the link to the calculator! Much better than the spreadsheet I slapped together myself. My employer also offers the Roth(k) and I have been doing some scenario planning as well.

Thanks for the link to the calculator! Much better than the spreadsheet I slapped together myself.

]]> By: Honest Dollar http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126951 Honest Dollar Mon, 10 Dec 2007 16:40:16 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126951 I'm a little surprised that the calculator puts the Roth 401(k) above the traditional 401(k) no matter what. It seems to me that if your tax bracket is lower in retirement and you reinvest any tax savings over the years into an ordinary taxable account (which will be taxed at the long-term capital gains rate when withdrawn in retirement), then the traditional 401(k) would be better. What am I missing? This is more for my intellectual curiosity than to advocate traditional 401(k)s over Roth 401(k)s, since I have no idea what my tax bracket will be in retirement or whether the tax rates on brackets and on capital gains will change between now and 40+ years from now. I’m a little surprised that the calculator puts the Roth 401(k) above the traditional 401(k) no matter what. It seems to me that if your tax bracket is lower in retirement and you reinvest any tax savings over the years into an ordinary taxable account (which will be taxed at the long-term capital gains rate when withdrawn in retirement), then the traditional 401(k) would be better. What am I missing?

This is more for my intellectual curiosity than to advocate traditional 401(k)s over Roth 401(k)s, since I have no idea what my tax bracket will be in retirement or whether the tax rates on brackets and on capital gains will change between now and 40+ years from now.

]]> By: klerg http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126946 klerg Mon, 10 Dec 2007 15:57:58 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126946 Lucky dog!!! I would wet myself if my company offered a Roth 401(k). Lucky dog!!! I would wet myself if my company offered a Roth 401(k).

]]> By: fin_indie http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126944 fin_indie Mon, 10 Dec 2007 15:54:01 +0000 http://www.consumerismcommentary.com/2007/12/10/here-comes-the-roth-401k/#comment-126944 So the question is: if you plan to retire in less than 4 years (the current plan), is it worth trying to take advantage of this? So the question is: if you plan to retire in less than 4 years (the current plan), is it worth trying to take advantage of this?

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