Comments on: The Complete Guide to Choosing Between a Traditional 401K and Roth 401K

By: A_Patel

A_Patel — Mon, 11 Apr 2011 18:30:18 +0000

This is a good article, but it still didn’t add much to what I already knew. The way I am beginning to look at this is, there is no right answer. For me, I have decided to invest as much as I can in my traditional 401K and max out on Roth IRA. Sure the Roth pot will be a lot less when I retire, but the tax savings I have now from my traditional 401K help me get by with less disposable income as of today. When I retire, I will be able to use the standard tax deductions to help avoid some taxes on the traditional 401K withdrawals, while using the tax free Roth withdrawals to add to my retirement income. A couple of tips I received years ago have been helpful: Tip# 1: Ensure that you have $30K in retirement savings by age 30 and to carry on with similar savings rate throughout the working career and you will be fine in retirement years after you reach the full social security age. One other tip someone gave me was to start saving about 20% of your income (savings to include employer contribution to 401K etc.) starting Day 1 of your working career (~mid 20s) and you will have enough saved by the time you retire at about 65.

My motto: Be stingy now to have a peaceful retirement later…. I am better-off saving more while I am able to work rather than worry about every penny at retirement.

By: Natalie

Natalie — Fri, 28 Jan 2011 05:36:29 +0000

Correction- 401k contributions do have to pay FICA. HSA contributions made through your employer do not.

By: Natalie

Natalie — Thu, 27 Jan 2011 00:59:54 +0000

Because I’m in the 10% tax bracket I thought that the Roth was a no-brainer and I have been contributing to this since it was an option. However this year I had a child and started receiving earned income credit or EIC. After looking at the tax table and doing some quick calculations I realized that if I would get a 16% return on EIC for every dollar I would put in my traditional rather than Roth account. I then realized that I would also get a better savers credit (20% instead of 10%) if I put enough in my traditional. So if your income is low enough to get credits based on income, it might actually be better to contribute to a traditional rather than a Roth. I figure I’ll be getting an additional 26% in tax credits for every dollar I contribute and that is counter intuitive to the normal advice that those young and in lower income brackets should choose Roth 401k. I can even increase my contribution significantly and still have the same take home pay.

Other things to consider are the fact that traditional contributions don’t have to pay Fica or medicare and that even when you are “taxed” upon withdrawal you still don’t have to pay only federal (and state if applicable) taxes on investment income, not FICA or medicare. Also, I could forsee having two accounts and upon retirement withdrawing just enough from the traditional that I wasn’t taxed on the amount (basically up to my standard deduction plus exemptions) and withdrawing the rest from the Roth. In this scenario I would still have a traditional withdrawal but still not pay any tax.

Oh man, tax planning is the bomb.

By: Real Estate IRA

Real Estate IRA — Sat, 20 Feb 2010 14:57:45 +0000

I think that Roths are great because they will enable you to have better control over your tax bracket when you get older. You can control whether you want tax free distributions or not. Traditional IRAs get so much more attention because of the tax deductibility.

By: Budgeting Tips

Budgeting Tips — Wed, 12 Nov 2008 02:56:25 +0000

From everything I’ve read about the Roth 401k, it certainly seems like the wave of the futre, but I still can’t imagine everyone is going to give up their traditional 401k for this alternative product.

By: Gareth

Gareth — Sun, 06 Apr 2008 16:50:13 +0000

Thanks for this article!
Another interesting consideration you didn’t mention is whether the government will find ways to tax you without increasing taxes. Take for example the recent history with social security taxes (all the distributions were originally tax free, but now up to 70% can be taxed) – you should consider the possibility of this happening to the Roth 401K as well.

To me, it seems like another variation on the question:
If I offered you $10,000 today, or $15,000 a month from now, which would you take?
- There are many reasons why $15,000 a month from now could be the wrong choice, how much do you trust me that I’ll really give you $15,000?, or that you’ll be able to find me?

By: G.E. Miller

G.E. Miller — Mon, 18 Feb 2008 01:03:28 +0000

Hi Derek. It’s a perfectly reasonable strategy for those who don’t feel strongly enough to go with one of the two investments over the other, or those who want more of an equal balance of being taxed now and being taxed at retirement.

By: Derek

Derek — Sun, 17 Feb 2008 23:28:47 +0000

If possible, what are your thoughts on leveraging both Traditional and Roth 401(k)?