Quote:
Originally Posted by guppy
I was recently speaking with someone about how I wanted to open up a Roth IRA and they didn't seem that impressed with the idea. I tried to explain how it'd be nice to make contributions after taxes so that 1) I wouldn't be taxed on the money when I do decide to withdraw it for retirement and 2) in an absolute emergency, I would have access to my contributions. Compared to my husband's 401k and my 403b, those seemed like good incentives. This person then said how they contribute to their 401k after taxes to get the same benefits as the RothIRA, so there'd be no reason for them to open a Roth. My husband and I both checked with our employers, and we don't have this option.
Do any of you have this option and is it necessarily better than a ROTH IRA?
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There could be many different terms your co workers are missing
a) There are before tax 401k contributions
b) there are after tax 401k contributions
c) there are Roth 401k contributions which are taxed
all 3 are different. They have different taxation rules
a) and b) are pre-tax going in
a) is taxed 100% coming out
b) only gains are taxed coming out
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the reasons people do this range from not having a Roth 401k option, to meeting/exceeding the yearly max
Do not muddy the reasons to do this with the "facts" of what the rules are.
c) is taxed going in and not taxed coming out
c) can be rolled into a Roth IRA (rollover) at retirement. If you pass the 5 year test (account existed for more than 5 years) I believe you can withdraw Roth 401k contributions similar to Roth IRA contributions. There are no RMDs on a Roth IRA.
A Roth 401k and a Roth IRA will work the same with different contribution limits (401ks have higher contribution limits).
IMO the benefit of the Roth includes no RMDs at age 70.5- gives the person owning the assets much more freedom to access the money.
Much of the 401k vs Roth choice comes down to 3 decisions... one does not trump the other, you just need to make best decision based on these 3 factors for your situation.
1) Taxes (now, future working years and in retirement)
401k gives you a tax break now
Roth gives you tax free income later
2) Withdraw rules
Roth accounts have no RMDs at age 70.5, traditional 401k and traditional IRAs do. If a person has a pension coming to them, they really need to look at this issue carefully.
3) Choices- not all 401ks are considered equal. I have had 5 401ks, and all had top notch funds which make many others jealous. But I read posts all the time on 5 different boards on 401ks with nightmare selections. If you cannot get access to quality investments (or build a quality portfolio) in your 401k, you have other issues to consider, and this makes an IRA (traditional or Roth) more attractive.
A fourth consideration is inheritance rules, but I would not want to muddy waters with those issues, as I think the 3 above are more important.