Pre-tax VS Roth 401k

[Ryan]

I just started working for a new company. They offer a choice of pretax or roth 401k retirement plans and will match up to 6%. Lots off opinions on the internet. Should I take the PT or Roth?

 

[Reggie West]

I would do the 401k. You will build a bigger nest egg faster than a Roth. I don't know if the company will match anything by doing the Roth IRA.

 

[Turbo-Archie]

Isn't the ROTH the pre-tax?


..

 

[Ryan]

I thought the roth 401k was like the roth ira and was pre taxed. My company is offering a pre tax 401k or a roth. This is why I am cofused.

 

[Tom Tom Turbo]

As a financial advisor, I'd take the Roth 401k if all other variables are equal. Sure you don't get to deduct it from your income taxes, but you get tax deferred growth, and when it comes time to withdrawal, you'll pay no income tax on it. Unless you really need a tax deduction, got with a Roth.

Also, if you are contributing more than the amount required to get the match from them, I would look at investing the difference in a Roth IRA, as they will typically have more investment choices than your employer offers. Feel free to PM me with any questions.

 

[gnxtc2]

As a financial advisor, I'd take the Roth 401k if all other variables are equal. Sure you don't get to deduct it from your income taxes, but you get tax deferred growth, and when it comes time to withdrawal, you'll pay no income tax on it. Unless you really need a tax deduction, got with a Roth.

What you're stating, the interest that is accured is tax free?

Pay me now or pay me later.

Billy T.
gnxtc2@aol.com

 

[Tom Tom Turbo]

What you're stating, the interest that is accured is tax free?

Pay me now or pay me later.

Billy T.
gnxtc2@aol.com

in a Roth 401K or Roth IRA, you contribute money that you have already paid current income tax on. The benefit is, all of the interest, gain, etc is withdrawn income tax free, assuming you don't touch it until you're 59 1/2 years old. This is an awesome benefit....especially since there is little chance that your income tax bracket or federal income tax rates will decline over your lifetime. So suck it up, pay the tax now, and let that money compound in interest for 20,30,40 years of a working career and then get to your money in retirement tax free.

The catch, you can't deduct your contributions from your taxes now, and you're limited to $16,500 of contributions per year, and with your employer's match, it cannot exceed $45,000 per year (good luck hitting that number anyway though)

 

[lotzagoodstuff]

First and foremost: kudo's to you for any effort you make towards saving towards your retirement. Any plan is better than no plan.

There are a lot of variables, but unless you have a home loan with lots of interest, many children, or some other giant write offs: I would recommend doing a 401K over a Roth, especially with the matching. When I buy stock I want to buy it with pretax money, that is my "gross" dollars, not the "after-tax/net" money in my wallet. Think about it: you are going to "pay your retirement" before Uncle Sam takes a penny of your money up to $16,500 per year. Then your company is going to match the first 6%. Then you are going to pay less in taxes as your yearly taxable income will be lowered by $16,500. And if your investment and matching goes up, don't you want to take advantage of having a larger nest egg?

Yes, you will likely pay more in taxes when you take it out during retirement, but if you are worried about losing to much to Uncle Sam when you quit working, I'd say you've done well for yourself.

If possible, I'd suggest doing a 401K now and a Roth down the road, or if you have anything left over after your pre-tax investment.

Just my .02 worth, which along with $3.80 will get you a Venti Latte at the Starbucks of your choosing.

 

[The Blob]

I just started working for a new company. They offer a choice of pretax or roth 401k retirement plans and will match up to 6%. Lots off opinions on the internet. Should I take the PT or Roth?

A Roth, whether it be in the form of an IRA or 401K, is the best retirement deal out there by far. They are such a good deal that the only way Congress would pass it was if high income people were not allowed to have them. (We must punish the rich under the guise of "fairness" )

Anyway, follow the advice of the one financial planner who has posted a reply so far.

Oh, and hopefully you are also researching this on your own because it is pretty important that you understand basic financial things such as this. Amazingly, most people don't.

 

[TexasT]

A Roth, whether it be in the form of an IRA or 401K, is the best retirement deal out there by far. They are such a good deal that the only way Congress would pass it was if high income people were not allowed to have them. (We must punish the rich under the guise of "fairness" )

Anyway, follow the advice of the one financial planner who has posted a reply so far.

Oh, and hopefully you are also researching this on your own because it is pretty important that you understand basic financial things such as this. Amazingly, most people don't.

I have to agree that the roth ira and roth 401k are a great deal. Unless you are in a really high tax bracket, I'd pay the tax now when you know the rate. There is no guarantee how much the gov will want in the future on your money. Also, pay attention to what your money is invested in. The wrong things loose money as there is no guarantee of future gains as many who are near retirement are finding out.

 

[ijames]

How high do you think your income taxes will be when you are withdrawing from the 401K? If you think they will be lot lower than now do the conventional plan since you pay the taxes at withdrawal, if you think they will be about the same do the Roth .

 

[Sydwyndr]

I would try clarkhoward.com. He has a radio talk show and he has very good information

 

[S10xGN]

Do both if you can afford it. I'd say if you're young, do the Roth for sure. The younger you start saving, the better. When Roth's became available, I was firmly ensconced in the 401k mode.

I'll tell you this little story. I worked for a major oil company (actually 5 at the same plant, 4 of them on the same unit). Co #1 sold out to Co #2 in 1986, but Co #2 still offered a defined pension plan. I was saving 3% of my pay in a 401k, just enough to get the company match. Co #2 sold out to Co #3 in 1994. Ooops, no more pension plan! Here I am, age 42 with almost nothing to show (< 50k), and no more pension. Co #3 did however, offer a sweet 401k plan. They'd match double the first 6% and we could contribute up to 9%. So I started putting in 9%, plus the Co's 6% match. Then Co #3 reorganized and became Co #4, then sold out again in 2005. Somewhere in there, our union won us the right to contribute another 3% (no Co match) and I was up to 18% of my gross going into savings, 12% of that before tax. I was able to retire in Jan of this year at age 57 1/2 because of other circumstances (two leftover "frozen" pensions from previous Co's, plus my wife is old enough to get her IRA without penalty). I have managed to save more than enough for our lifestyle in just 16 yrs, even with a couple of pretty hard crashes. My 401k's are rolled over into Vanguard IRA's and all I do now is watch them, worry, and make occasional changes to our asset allocations. Not a bad way to spend a few hours a week!

Start saving now and you won't be disappointed. :wink: Keeping active in the savings process helps too.

 

[Ryan]

Maybe a little more info about my current situation. I am 40, just retired from the Navy, Married and own a house. Should I still go with the regular pre-tax 401k?

 

[Dabigguy]

Just a thought guys......a Roth may be tax-free right now, but what the future holds, we canot say. All it takes is the stroke of a pen and that tax-free Roth becomes a cash cow for our government.

You still have almost 20 years before you can retire. What were the rules 20 years ago and what was the Social Security retirement rules in 1991?

 

[The_Six]

I’m in the same boat as you. The company I work for matches 100% of 8% of pay and you can put in as much as you want after that up to the $16500 the government has it capped at. On top of this you can also save up to $5000 a year in an IRA or Roth IRA. What I do is put 10% of my pay in to the pretax 401k so that I could get the companies match money then I put $5000 a year in a ROTH IRA I do it threw fidelity and pay them around $190 every pay day, This way I have a mix of both to work with come retirement.

 

[S10xGN]

I’m in the same boat as you. The company I work for matches 100% of 8% of pay and you can put in as much as you want after that up to the $16500 the government has it capped at. On top of this you can also save up to $5000 a year in an IRA or Roth IRA. What I do is put 10% of my pay in to the pretax 401k so that I could get the companies match money then I put $5000 a year in a ROTH IRA I do it threw fidelity and pay them around $190 every pay day, This way I have a mix of both to work with come retirement.

Excellent moves!

 

[Ryan]

Thanks for all the info. I am learning a lot. I started signing up and came across a bunch of option. I kind of understand some of the choices. I need to choose a percentage to distribute my investment. I assume that putting 100 percent in the a certain "target retirement year" would be the way to go. I don't really understand the other choices.



Short-Term Reserves
Vanguard Federal Money Mkt Fund


Vanguard Prime Money Mkt Fund Inst


Bond Funds
Vanguard Short-Term Bond Index Sig


Vanguard Total Bond Mkt Index Inst


Domestic Stock Funds
Vanguard Extended Mkt Index Inst


Vanguard Inst Index Fund Inst Plus


International Stock Funds
Vanguard FTSE All-World ex-US Ist


Client Specific Funds
Target Retire Income Tr I


Target Retire 2005 Tr I


Target Retire 2010 Tr I


Target Retire 2015 Tr I

Target Retire 2020 Tr I


Target Retire 2025 Tr I


Target Retire 2030 Tr I


Target Retire 2035 Tr I


Target Retire 2040 Tr I


Target Retire 2045 Tr I


Target Retire 2050 Tr I


Target Retire 2055 Tr I


Supplemental funds

Fund Fund Symbol Fund Number Percentage
Bond Funds
Total Return Bond Fund


Wellington Trust TIPS


Domestic Stock Funds
Dodge & Cox Equity Fund


Longleaf Partners Small-Cap


Mid-Cap Value Fund


T. Rowe Price Instl Mid-Cap Equity Gr


Vanguard PRIMECAP Fund Investor


Wllngtn Tst Sm Cap 2000


International Stock Funds
DFA Emerging Markets Core Equity I


Templeton Instl Foreign Eq Ser Primary


Vanguard International Growth Inv


Client-Specific Funds
SAIC Common Stock Fund

 

[S10xGN]

Ryan,

Out of your list, Vanguard's Midcap has been the best bet for me over the years. I made the most off of Vanguard's Healthcare fund, but that's not in your list. All of my main movers are in high growth funds, which means you have to be willing to suffer through the "bad" to get the "good" without losing your stomach. At your age, you should be taking some risks. If you go with a "target" fund, pick one not too far out date-wise, it'll be a bit more aggressive. I can tell you this, I made more off my 401k each of the past two years than I made working, and I was pretty close to the SS cut-off! Of course, it won't always be that good...