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December 28, 2007


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I've had a Roth 401(k) since 1/1 of this year. I'm 32 and figure since I'm in a pretty low bracket right now to take the tax hit and allow it to grow tax-free for 30+ years. I am slightly concerned about betting on future tax rates, but am hoping if we do go to a national sales tax or such there would be some provision for us folks with Roths to ease the pain.

The Money article all but assumes that you DON'T invest the tax savings you get from investing in 401K vs Roth 401K and just spend it. One of the calculators I tried claimed to consider the value of invested tax savings yet when I did the math, the value of invested tax savings was listed as 0. Since I do invest tax savings (and a lot more), I did my own calculations using plain bank interest and I came out ahead with regular 401K. I suggest anybody who uses the calculator looks at the numbers in detail to ensure that the value of invested tax savings is calculated correctly.

Maybe most people don't invest tax savings from using 401K, but many do.

Additionally, depending on the income, removing 15500 from the income is the only thing that allowes them to contribute to Roth IRA as well. In other cases, 401K deduction may be all that keeps people from AMT. Yet in another case, someone may live in a high-tax state but plans to move to a lower income tax state on retirement. It really depends on the individual situation.

I recently switched jobs, but at my old job I had both. I was dumping most of my percentage into the Roth 401k. I haven't read up much on some of the details, but our company match from the Roth was required to go into the traditional 401k. Is this how it is required to work?

Jon - yes, in order for the employer to be able to deduct the contribution (which is why they do it in the first place) it has to go to the traditional 401(k) plan, otherwise that money would escape taxation forever. And we can't have that.

Most people likely will end up with lower tax rates, if only due to the difference between marginal rates and gross rates, but high savers likely will end up in higher tax brackets. If you plan for a constant standard of living, the traditional is better, while for a richer retirement, the Roth is better. Which are you planning for?

I switched to a Roth as soon as it was offered at my company last year. I think it's almost always a good idea to take advantage of Roth savings when/if you can--tax rates will eventually go up anyway, so even people in the highest brackets may never see a decrease.

Besides, the odds are that you won't always work somewhere with a Roth option (or you spouse won't), so I say take advantage of Roth funds while you can. You'll end up with tax-deferred savings, even if it's just from the employer matches which go into Traditional accounts.

Also, Roth accounts may not be around forever; congress may eventually decide they want that revenue back.

Kitty is exactly right. Most of the Roth vs. regular 401(k) calculators out there make HORRIBLE assumptions about tax savings to push the Roth ahead, when their models do not realistically reflect how people save at all!

I also agree with Meg. It used to be that Social Security benefits were never taxed, and people planned retirement figuring that it would always be like that. Now, though, you have to pay taxes on SS benefits if you meet certain conditions.

Don't count on the fact that enough people shouting "Foul! Double Taxation!" would keep the Roth tax-free. After all, Congress could easily reason that you don't have to pay taxes on the amount you contributed, but you will have to pay taxes on capital gains when you withdraw in retirement.

This doesn't mean that the Roth isn't a good investment. If it remains tax-free, and if your tax rate goes up in retirement (pretty likely given that tax rates now are at historic lows), then the Roth is a great choice. But you shouldn't stick all of your money into a Roth.

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