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Roth 401K?

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  • #1

    Roth 401K?

    My employer now offers a Roth 401K in addition to their regular 401K account... I have been investing my money in a Roth IRA with mutual funds (not thru my employer) instead of their 401K account as my employer doesn't offer any matching and has a limited selection of funds... What benefits, if any, are there in a Roth 401K vs. Roth IRA? I'm happy with how my Roth IRA account is performing and don't think I need to start with the Roth 401K but I am very unfamiliar with the Roth 401K scenario.

    Thanks.
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  • #2
    Re: Roth 401K?

    The Roth 401K has the same tax benefits as a Roth IRA except the limitations and eligibility restrictions are different:

    1) In a Roth 401K anyone who's employer provides one can participate regardless of their income level. Whereas with a Roth IRA, eligibility phases out between earnings of $95,000 and $110,000 for single filers and $150,000-$160,000 for married filers who file jointly.

    2) The maximum contribution for a Roth 401K per year is the same as a regular 401K ($15,000 for 2006 and $20,000 for those 50 or older). A Roth's IRA max is $4000 and $5000 for 50 or older. However, the limits apply to both types of 401K's. In other words, you can't save $15,000 in a 401K AND another $15,000 in a Roth IRA.

    The other difference is that the money put into a Roth 401K isn't pre-tax so you won't get the same tax benefits you may be getting now with your current 401K contributions.

    It sounds to me like it would be best if you maxed out your own Roth IRA first since the funds are better, then put the rest in your employers' Roth 401K. That is of course taking into consideration your tax situation. The regular 401K might be better if the tax write off would be more beneficial to you now as compared to retirement.

    Hope that helped.
    The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
    - Demosthenes

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    • #3
      Re: Roth 401K?

      I agree with kv's assessment.

      Comment

      • #4
        Re: Roth 401K?

        Seconded... or is that thirded?

        I had heard about Roth 401k's "limitations" from grumblings elsewhere. I didn't remember the details, but fortunately, kv pretty much spelled it out for us.

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        • #5
          Re: Roth 401K?

          I definitely think it is nice to have the Roth 401k option for those of us who don't mind paying the taxes now. I agree with previous assessment as well.
          My other blog is Your Organized Friend.

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          • #6
            Re: Roth 401K?

            It really depends. If you pay a lot in taxes now how do you know you will be in a higher bracket during retirement? I mean personally I pay a lot of taxes now so the regular 401k is better for us. I think it's circumstantial whether a Roth 401k is better than a 401k. If you make $200k and pay 35% as a single person, but are able to contribute to a regular 401k because of safe harbour contributions, then maybe you should.

            Savings is not a one size fits all answer.
            LivingAlmostLarge Blog

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            • #7
              Re: Roth 401K?

              Originally posted by LivingAlmostLarge
              It really depends. If you pay a lot in taxes now how do you know you will be in a higher bracket during retirement? I mean personally I pay a lot of taxes now so the regular 401k is better for us. I think it's circumstantial whether a Roth 401k is better than a 401k. If you make $200k and pay 35% as a single person, but are able to contribute to a regular 401k because of safe harbour contributions, then maybe you should.

              Savings is not a one size fits all answer.
              You make a valid point. We make significantly less than 200k and pay very little in taxes. So the roths make the best financial sense for us.
              My other blog is Your Organized Friend.

              Comment

              • #8
                Re: Roth 401K?

                Originally posted by LivingAlmostLarge
                It really depends. If you pay a lot in taxes now how do you know you will be in a higher bracket during retirement? I mean personally I pay a lot of taxes now so the regular 401k is better for us. I think it's circumstantial whether a Roth 401k is better than a 401k. If you make $200k and pay 35% as a single person, but are able to contribute to a regular 401k because of safe harbour contributions, then maybe you should.

                Savings is not a one size fits all answer.
                Yes, and another factor -- even if you're not making that much money -- is the availability of tax breaks that phase out at certain income levels. Lowering your taxable income via pre-tax contributions could make you eligible for a juicy tax break you wouldn't otherwise be eligible for.

                Similarly, if you make a little too much to invest in a Roth IRA, contributing some to a pre-tax 401k could get you below the maximum income level. That would allow you to open and fund a Roth in addition to your 401k.

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