401k and Roth 401k at work - help

[Gruntina]

My work just sent announcement this week that they are adding the Roth 401k as an option starting in December of this year. (Our 401k is under Fidelity)(For those who need info they do have a trust fund as well)

From reading on the boards in the past year, it seems a Roth IRA was all the raves and I eventually wanted to open one when I was ready.

I was reading the pamphlets and some web site on the new Roth 401k options and now I am thinking it might not be the best choice for me even if it was a combination of the regular 401k and the Roth 401k which is allowed here.

About me: I am age 31 and have been contributing 10% to the 401k. Company has a matching program that pays 40 cents to each dollar I put in until a certain amount maximum they pay. It takes me a full 10% of my salary to get the company's full match. I started contributing to the 401k a little over 3 years ago and I am fully vested now. Rate of return has been up and down averagely between 6% through 17%. Note: first 2 years were 5% contribution and finally upped to 10%.

The Company rules that we are not allowed to contribute more than 30% of our salary to the 401k and Roth 401k. If I contributed up to 30 percent of my pay, (exposing my income here) it would not max out the federal maximum contribution to retirement annually.

So it seems like the traditional 401k remains the best choice since I will not be able to max out the full annual amount to take advantage of being able to put in more money (tax wise) compared to the traditional which is pretax so less money in there to keep (Roth 401k has no limit except for the federal max limit so around 15500 for this year I believe).

We have been on the decline in the last 2 decade on lowering tax bracket and there is even a pending law that might lower it more in queue. So I can not say I "knowingly" will be in a higher tax bracket when I retire which favors the Roth 401k. If the tax bracket is the same or lower then the Traditional 401k is the better bet.

My husband already is a homeowner prior to us meeting and marriage. I would not qualify for the new home incentives that falls under the Roth 401k.

So I am not really seeing how the Roth 401k might benefit me. I do plan to eventually climb up to contribute up to at least 20% of my pay.

Does anyone have any advice regarding putting my contribution in a combination of 401k and the Roth 401k? Or should I just stick with the traditional 401k? I eventually want to contribute up to 20% sometimes next year.

[jIM_Ohio]

If I had to offer blanket advice, it would be to send money to 401k pre tax.

The conventional wisdom is if you think your tax rate in retirement will be higher, the Roth account will benefit you. If same or lower, the traditional 401k will be the best benefit.

No guarantee what is considered conventional now is appropriate for you or not.

I suggest taking the tax savings now. Other conventional wisdom suggests to defer taxes now for as long as possible. Then when you retire, find other ways to defer taxes or pay low taxes.

So the two sets of conventional wisdom actually give opposite advice in this case, IMO.

Because you are new to the retirement accumulation phase (5 years in??), I suggest defferring taxes for now. Maybe you decide to open up a Roth IRA in a few years, and this diversifies your retirement tax strategy.

[InDebtInDC]

The Roth 401(k) is new so it's a little tricky. My suggestion is to consider the disclosure packet closely so you know what limits your employer puts on you.

[anonymous_saver]

Am I understanding you correctly when you have to put in 10% of your income into your 401(k) in order to get the maximum match? Would this be true of a Roth 401(k) as well?

If you are planning on increasing your contribution up to 20% within the next year, I would instead put up to your employers match into whichever 401(k) choice you choose, and then the full amount (if possible) into a Roth IRA. Then if you ever had additional money, I would increase your 401(k) contribution, but only when you are maxing out your Roth IRA.

Personally, I would choose the Roth 401(k) instead of the Traditional 401(k). I really like the idea of being able to retire and not worry about taxes at all. I know others would say that they like the combination of a Traditional 401(k) and a Roth IRA so you can get advantages of each, that is not a horrible choice by any means.

Do you have an emergency fund, any debt?

[Gruntina]

Am I understanding you correctly when you have to put in 10% of your income into your 401(k) in order to get the maximum match? Would this be true of a Roth 401(k) as well?

Yes I need to put in 10% of my salary just to get the maximum match.

The company will provide the matching program to the Roth 401k if an employee wishes to use that option only. We imedietly get our matching contribution at each paycyle and we do not have a vesting period unless an employee was a merger and was under a different plan from their original company they were hired at. We would still use the percentages contribution to the Roth 401k rather than providing a fixed amount net pay. If I put 10% of my pay in the Roth 401k, they will pay the taxes on it and I will have less in there than the pretax 10% for the regular 401k. My general paycheck will be in a higher tax bracket if I use the Roth 401k only.

If you are planning on increasing your contribution up to 20% within the next year, I would instead put up to your employers match into whichever 401(k) choice you choose, and then the full amount (if possible) into a Roth IRA. Then if you ever had additional money, I would increase your 401(k) contribution, but only when you are maxing out your Roth IRA.

What is the different advantage of a Roth IRA and the Roth 401k? If I ever leave my job, I can transfer the Roth 401k into a Roth IRA account.

Personally, I would choose the Roth 401(k) instead of the Traditional 401(k). I really like the idea of being able to retire and not worry about taxes at all. I know others would say that they like the combination of a Traditional 401(k) and a Roth IRA so you can get advantages of each, that is not a horrible choice by any means.

I agree it sound nice not to have to worry about taxes when I retire.. but I also hate the idea of having too many retirement account to keep track of.

Do you have an emergency fund, any debt?

I have car payments@ 3.9@ interest and mortgage payment. We do have an emergency fund.

[Gruntina]

Am I understanding you correctly when you have to put in 10% of your income into your 401(k) in order to get the maximum match? Would this be true of a Roth 401(k) as well?

Yes I need to put in 10% of my salary just to get the maximum match.

The company will provide the matching program to the Roth 401k if an employee wishes to use that option only. We immediately get our matching contribution at each paycycle and we do not have a vesting period unless an employee was a merger and was under a different plan from their original company they were hired at. We would still use the percentages contribution to the Roth 401k rather than providing a fixed amount net pay. If I put 10% of my pay in the Roth 401k, they will pay the taxes on it and I will have less in there than the pretax 10% for the regular 401k. My general paycheck will be in a higher tax bracket if I use the Roth 401k only.

If you are planning on increasing your contribution up to 20% within the next year, I would instead put up to your employers match into whichever 401(k) choice you choose, and then the full amount (if possible) into a Roth IRA. Then if you ever had additional money, I would increase your 401(k) contribution, but only when you are maxing out your Roth IRA.

What is the different advantage of a Roth IRA and the Roth 401k? If I ever leave my job, I can transfer the Roth 401k into a Roth IRA account.

Personally, I would choose the Roth 401(k) instead of the Traditional 401(k). I really like the idea of being able to retire and not worry about taxes at all. I know others would say that they like the combination of a Traditional 401(k) and a Roth IRA so you can get advantages of each, that is not a horrible choice by any means.

I agree it sound nice not to have to worry about taxes when I retire... but I also hate the idea of having too many retirement accounts to keep track of.

Do you have an emergency fund, any debt?

I have car payments@ 3.9@ interest and mortgage payment. We do have an emergency fund.

[anonymous_saver]

What is the different advantage of a Roth IRA and the Roth 401k? If I ever leave my job, I can transfer the Roth 401k into a Roth IRA account.

I agree it sound nice not to have to worry about taxes when I retire... but I also hate the idea of having too many retirement accounts to keep track of.

The different advantage of the Roth IRA over the Roth 401(k) would be that in a Roth IRA, you could have it be apart of any company you want to and be able to access all mutual funds out there. With a Roth 401(k), you are limited to your employer's options.

As far as having too many retirement accounts, when you retire, you could always roll your money over into an IRA account, instead of leaving it with your employer. I would actually encourage consolidating like this because of the above point that I made (having access to all mutual funds that exist instead of being limited by your employer's options).

[Gruntina]

The different advantage of the Roth IRA over the Roth 401(k) would be that in a Roth IRA, you could have it be apart of any company you want to and be able to access all mutual funds out there. With a Roth 401(k), you are limited to your employer's options..

That is true... But I am really happy with the choices I have at my employer's. We are #1 in an industry for a world wide company so we have many choices as they strive to keep the talented employees at our company by keeping them happy with the perks. But if I had to leave the company this would be in my thoughts. [/QUOTE]

In a Roth 401k, I would think that is a better choice as in the amount I can put in. I can put in well over the IRA max amount.

As far as having too many retirement accounts, when you retire, you could always roll your money over into an IRA account, instead of leaving it with your employer. I would actually encourage consolidating like this because of the above point that I made (having access to all mutual funds that exist instead of being limited by your employer's options).

This is something I will keep in mind as I retire. This is a very good point.

[humandraydel]

Don't forget that taxes are low, historically speaking. With all the debt our country has accumlated there is a good chance that taxes will be higher in the future. I think a Roth is a good idea for tax diversification because it can help you lower your total lifetime tax bill by giving you more flexibility in retirement.

Also, I'm pretty sure that even if you contribute your 10% in the Roth 401k, the company has to contribute their 4% in the traditional 401k.

[Gruntina]

Thanks for all your feedbacks. Its nice knowing there is people out there I can talk to about things like these and get feedback with intention of good budget minded and not the norms of the population who do not make any plan with their money.

I just got off the phone from the benefits manager. She was saying that the company match portion becomes mine 100% once it is funded in the Roth 401k so that still can be rolled into a future Roth IRA if needed.

I still don't get it! But... they are offering courses for employees in a few weeks to learn more about the Roth 401k. Yay! I am signed up for that.


I was thinking I wanted to continue to contribute 10% to the traditional 401k and then contribute additional 5% to the Roth 401k starting in December and working up my way to 10% by the end of next year the Roth 401k so a combined of 20% of my salary are contributed to the retirement accounts.

I also learned if you retire with a Roth 401k, there is an annual minimum distribution required unlike the Roth IRA. But I am thinking it's not an issue if it was rolled into a Roth IRA prior to retirement.

I also like the idea that I can contribute more than $5000 in the Roth 401k unlike the Roth IRA limit for 2008.

Will let you know what I decide on after I take the course.

[jIM_Ohio]

Thanks for all your feedbacks. Its nice knowing there is people out there I can talk to about things like these and get feedback with intention of good budget minded and not the norms of the population who do not make any plan with their money.

I just got off the phone from the benefits manager. She was saying that the company match portion becomes mine 100% once it is funded in the Roth 401k so that still can be rolled into a future Roth IRA if needed.

I still don't get it! But... they are offering courses for employees in a few weeks to learn more about the Roth 401k. Yay! I am signed up for that.


I was thinking I wanted to continue to contribute 10% to the traditional 401k and then contribute additional 5% to the Roth 401k starting in December and working up my way to 10% by the end of next year the Roth 401k so a combined of 20% of my salary are contributed to the retirement accounts.

I also learned if you retire with a Roth 401k, there is an annual minimum distribution required unlike the Roth IRA. But I am thinking it's not an issue if it was rolled into a Roth IRA prior to retirement.

I also like the idea that I can contribute more than $5000 in the Roth 401k unlike the Roth IRA limit for 2008.

Will let you know what I decide on after I take the course.

traditional 401k

you put in 10% pre tax
the 4% company match is also pre tax

when you retire, you will pay taxes on withdraws from both

Roth 401k
you put in 10% post tax
the 4% company match is pre-tax

you would not pay taxes on Roth withdraws, you would pay tax on match withdraws.

Company match is always pre-tax (company did not pay taxes on the compensation, so I can assure you the government wants to tax this money somehow).

If you convert the match to a Roth, you would owe taxes as part of the Roth conversion. You need to earn less than 105,000 the year of the conversion.

Roth IRA- 2007 max is $4000, 2008 Max is $5000. There is a $1000 catch up allowance.

401k (Roth or traditional), max is $15,500 in 2007 and 2008. There is a $5000 catch up allowed.

Catch ups are allowed for people older than 55 I think.

[autoxer]

We have been on the decline in the last 2 decade on lowering tax bracket and there is even a pending law that might lower it more in queue. So I can not say I "knowingly" will be in a higher tax bracket when I retire which favors the Roth 401k. If the tax bracket is the same or lower then the Traditional 401k is the better bet.

I think tax brackets will be higher in 30+ years and I think I will be making more money in the future, so while my tax bracket is low, I'm going to take advantage of my Roth IRA (my company doesn't offer a roth 401k at the moment). If I was already in one of the higher tax brackets, then I would focus on the traditional 401k.

[sweeps]

I say hedge your bets... do some pre-tax 401k and do some Roth 401k. That way you don't have to guess about future tax rates, AND it gives you more flexibility when it's time to withdraw.

[kv968]

If you convert the match to a Roth, you would owe taxes as part of the Roth conversion. You need to earn less than 105,000 the year of the conversion.

Starting in 2010, there is no income limit on converting to a Roth. You would of course still owe the consequent taxes on the match as Jim stated.