Should I Change My Traditional 401k to a ROTH 401k

[VolAgent]

Franz...I am single at the moment.... who knows for how long.... so you think put everything into the traditional 401k instead of the ROTH 401k??? What are your thoughts on that???

Max out your 401k, and then put a corresponding amount into a whole life policy. One is taxable, the other is tax free, done properly. Also, while everyone tells you how much better the stock market performs, you might be amazed at how well the whole life does in comparison.

 

[kdk0425]

well.... actually wouldnt the ROTH 401k be tax free as well?? i know the trad 401k is tax defered but the ROTH 401k would grow taxfree and be received tax free correct???

 

[VolAgent]

well.... actually wouldnt the ROTH 401k be tax free as well?? i know the trad 401k is tax defered but the ROTH 401k would grow taxfree and be received tax free correct???

Sorry I wasn't clear, max out the traditional 401k. Get some tax deduction now, and then save some in the whole life without tax deduction.

Please note, there is no absolutely correct answer to this question. Its all about how we perceive the situation, our experience, and our knowledge.

 

[scagnt83]

First of all I second Vols comment about how there is no right or wrong answer to this.

And the only way to definitively find out which method will come out ahead is to wait until your old and grey and take retirement distributions....

Its mostly about what you are comfortable with after being educated on the subject.


Roth:
-The obvious is that its tax free.

-The not so obvious is that it allows for much greater certainty when planning for retirement. With a traditional 401k your projected tax rate at retirement is a huge factor; one that is unknown and can only be estimated. With a Roth it doesnt matter what tax rate you will be at.

-Tax rates are at a historical low for this country (believe it or not). Do you want to be taxed during a time of historical low tax rates, or in the future when you have no idea where tax rates will be (think trillions in government deficits)

-You get a tax deduction at the end of the year for contributing to a Roth 401k


Traditional:
-The cons were highlighted by the Roth; future tax uncertainty, low current tax rates, etc.

-The best thing about the traditional is being able to contribute pre-tax. The more you contribute, the more it becomes currently beneficial to do contributions pre-tax.
Ex:
Roth;.......................................Traditional;
$10,000 per month income.................$10,000 income
- 20% to taxes.............................- $1,000 Roth contribution
=................................................=
$8,000 pre-contributions................$9,000 net pretax
- $1,000 Roth contribution...............- 20% taxes
= =
$7,000 Net take home pay.............$7,200 Net take home pay


So as you can see, the traditional will give you tax savings now. The Roth will possibly/probably give you tax savings in the future.

One can argue that the tax savings of the Traditional 401k gives you extra money to contribute, thus more savings.
But if you are maxing out your 401k then this is a moot point unless you plan on contributing the difference to an alternative investment.


But tax diversification is not a bad thing at all. It gives you choices and flexibility in the future.

I would lean more towards tax free savings over taxable; but it wouldnt hurt to still do a portion in your traditional.... maybe take the tax savings and put it towards a tax free permanent life policy (this would be a stable risk free portion of your portfolio; it would allow you to be more aggressive with your market investments).

 

[kdk0425]

You get a tax deduction at the end of the year for contributing to a Roth 401k.....

scagnt83 .........So what kind of tax deduction do you get at the end of they year for contribution to the ROTH 401k??? i thought that it was put in and NOT tax deductible??? another question i have is what are the chances of the goverment changing the rules on this ROTH 401k in 10 or 15 years and then I missed out on the taxable deduction all those years??
thanks again for your response

 

[VolAgent]

You get a tax deduction at the end of the year for contributing to a Roth 401k.....

scagnt83 .........So what kind of tax deduction do you get at the end of they year for contribution to the ROTH 401k??? i thought that it was put in and NOT tax deductible??? another question i have is what are the chances of the goverment changing the rules on this ROTH 401k in 10 or 15 years and then I missed out on the taxable deduction all those years??
thanks again for your response

It was a typo. He meant to say -1,000 401k contribution. Generally there is no tax deduction for contributing to a Roth anything. I say generally, because there is a tax credit for lower income individuals who contribute to an IRA, Roth IRA, 401k or Roth 401k. This is in addition to any other deduction to which they are entitled.

 

[scagnt83]

You get a tax deduction at the end of the year for contributing to a Roth 401k.....

scagnt83 .........So what kind of tax deduction do you get at the end of they year for contribution to the ROTH 401k??? i thought that it was put in and NOT tax deductible??? another question i have is what are the chances of the goverment changing the rules on this ROTH 401k in 10 or 15 years and then I missed out on the taxable deduction all those years??
thanks again for your response

It is either a credit or a deduction for a Roth 401k; it might be for low income only, I dont know the exact specifics, but there is one available for some people.
(I doubt its dollar for dollar)

 

[arnguy]

My understanding of the IRS regulations is that you cannot deduct contributions to a Roth IRA; however, the qualified distributions are income-tax free. The contributions are made with post-tax dollars.

 

[VolAgent]

My understanding of the IRS regulations is that you cannot deduct contributions to a Roth IRA; however, the qualified distributions are income-tax free. The contributions are made with post-tax dollars.

Saver's Credit. It caps out at 50,000 AGI for married couples.

This just proves Dave Ramsey is a piker. If he really cared about his listeners, he'd be preaching this along with a Roth IRA. I imagine at least half of his audience would qualify for some level of tax credit for this program.

 

[scagnt83]

My understanding of the IRS regulations is that you cannot deduct contributions to a Roth IRA; however, the qualified distributions are income-tax free. The contributions are made with post-tax dollars.

I said you get a tax deduction or credit; I never said that all of the contributions are deductible.

What I was thinking of was the Retirement Savings credit.
Its not exclusive to roths, it covers all qualified retirement plans.

It gives a credit (better than a deduction) of up to $2k to people who have contributed to a qualified plan.
It does have income restrictions though; 50k is top for joint, 40k is top for head of household.

So not exclusive to Roths, but a benefit if you fall in the income brackets non the less.


A credit is better than a deduction because it lowers tax liability dollar for dollar; as opposed to a deduction which just lessens your AGI.