Comments on: Reader Question: To Roth 401(k) It or Not? http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 25 May 2012 02:50:51 +0000 hourly 1 http://wordpress.org/?v= By: Reader Appreciation Initiatives 12-20-2007 » Reader Appreciation Project http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-193903 Reader Appreciation Initiatives 12-20-2007 » Reader Appreciation Project Fri, 21 Dec 2007 01:39:48 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-193903 [...] Reader Question: To Roth 401(k) It or Not? [...] [...] Reader Question: To Roth 401(k) It or Not? [...]

]]> By: Keith http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-193660 Keith Thu, 20 Dec 2007 16:46:06 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-193660 Besides all of the number crunching, you truly have to look at the political situation in the US and the bills that are coming due. Yes, you're in the highest tax bracket, but it could be much worse. The highest bracket is very low relative to what it used to be in the past. If you plan to take the same amount of income you're taking now and stay in the same bracket, you have to think about the chances of the brackets being changed. Think about it, Bush has been funding the war with borrowed money and is going to stick the next president with the bill. I'm not trying to be political, but there are a lot of government expenditures waiting to be filled. We have underfunded social security, medicare, huge debt, and a war to pay for. If certain people have their way, we'll also have universal health care. Who's going to pay for all this? We are. We can't afford it at the current rates we're at. The logical conclusion would be that taxes will go up in the future at some point of time. I'd hate to see them go up right as you retire and start taking your tax deferred withdrawals and end up paying higher rates. Sorry if it sounded political, but it is part of the big picture. Roth's are great for long term growth. Besides all of the number crunching, you truly have to look at the political situation in the US and the bills that are coming due. Yes, you’re in the highest tax bracket, but it could be much worse. The highest bracket is very low relative to what it used to be in the past. If you plan to take the same amount of income you’re taking now and stay in the same bracket, you have to think about the chances of the brackets being changed.

Think about it, Bush has been funding the war with borrowed money and is going to stick the next president with the bill. I’m not trying to be political, but there are a lot of government expenditures waiting to be filled. We have underfunded social security, medicare, huge debt, and a war to pay for. If certain people have their way, we’ll also have universal health care. Who’s going to pay for all this? We are. We can’t afford it at the current rates we’re at. The logical conclusion would be that taxes will go up in the future at some point of time. I’d hate to see them go up right as you retire and start taking your tax deferred withdrawals and end up paying higher rates.

Sorry if it sounded political, but it is part of the big picture. Roth’s are great for long term growth.

]]> By: Karen http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-192170 Karen Tue, 18 Dec 2007 18:08:01 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-192170 READER QUESTION: What is the benefit of increasing my contribution to my 401K that has maxed out my employer contribution (75% to 6.25% of my salary) vs. investing that money in a more stable place (i.e. money market or CD?) I have 20 more years to retirement. Thanks. READER QUESTION:

What is the benefit of increasing my contribution to my 401K that has maxed out my employer contribution (75% to 6.25% of my salary) vs. investing that money in a more stable place (i.e. money market or CD?) I have 20 more years to retirement. Thanks.

]]> By: 2008 Roth 401k For Me! | My Dollar Plan http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-192060 2008 Roth 401k For Me! | My Dollar Plan Tue, 18 Dec 2007 14:06:21 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-192060 [...] Stay tuned when we take a deeper look at the pros and cons of a Roth 401k, including reader reactions. In the mean time, check out All Financial Matters. He is helping a reader figure out whether or not to use the Roth 401k. [...] [...] Stay tuned when we take a deeper look at the pros and cons of a Roth 401k, including reader reactions. In the mean time, check out All Financial Matters. He is helping a reader figure out whether or not to use the Roth 401k. [...]

]]> By: Kieran http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-191703 Kieran Tue, 18 Dec 2007 00:59:13 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-191703 One other issue: Are you currently maximizing your 401(k) contributions and also saving some in a taxable account? If so, this strongly favors the Roth 401(k). The reason that by allowing you to pay taxes now on the invested funds with money outside the $15,000 contribution limit, you effectively increase the amount of money that is growing tax free. Put another way, assuming a 30% marginal tax rate now and at retirement, a $15000 Roth 401(k) contribution is the equivalent to a $19450 investment in regular 401(k) (which is $4500 more than the law currently allows you to invest in a regular 401(k)). Admittedly, you could invest that $4500 difference in a taxable account and then use it to pay the withdrawal taxes at the end, but the Roth avoids all the interim taxes on the taxable account (and avoids the need for interim tax-deferral strategies). it's better to have $15,000 in a tax free account than $15,000 in an account subject only to taxes on withdrawal plus approx. $5000 in a taxable account. One other issue: Are you currently maximizing your 401(k) contributions and also saving some in a taxable account? If so, this strongly favors the Roth 401(k). The reason that by allowing you to pay taxes now on the invested funds with money outside the $15,000 contribution limit, you effectively increase the amount of money that is growing tax free. Put another way, assuming a 30% marginal tax rate now and at retirement, a $15000 Roth 401(k) contribution is the equivalent to a $19450 investment in regular 401(k) (which is $4500 more than the law currently allows you to invest in a regular 401(k)). Admittedly, you could invest that $4500 difference in a taxable account and then use it to pay the withdrawal taxes at the end, but the Roth avoids all the interim taxes on the taxable account (and avoids the need for interim tax-deferral strategies).

it’s better to have $15,000 in a tax free account than $15,000 in an account subject only to taxes on withdrawal plus approx. $5000 in a taxable account.

]]> By: Aaron http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-190868 Aaron Sun, 16 Dec 2007 16:24:48 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-190868 I am younger and in a lower tax bracket and as you said I believe that the Roth is a no-brainer for myself. The benefits that it provides are quite amazing and cannot be ignored. I am younger and in a lower tax bracket and as you said I believe that the Roth is a no-brainer for myself. The benefits that it provides are quite amazing and cannot be ignored.

]]> By: Ryan S. http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-190131 Ryan S. Sat, 15 Dec 2007 12:14:29 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-190131 I love the idea of the Roth 401(k), but it's really hard to fund it to the maximum unless you make considerable amounts of money. I can barely do it with the conventional 403(b) (non profit equivalent to the 401(k)) and I make decent money. I love the idea of the Roth 401(k), but it’s really hard to fund it to the maximum unless you make considerable amounts of money. I can barely do it with the conventional 403(b) (non profit equivalent to the 401(k)) and I make decent money.

]]> By: Mike http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-189952 Mike Sat, 15 Dec 2007 04:27:35 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-189952 Thanks for addressing my question JLP and thank you Meg for your thoughts I hadn't considered that strategy but it seems quite sound. As for my "significant" contributions to my ESPP. We get a 10% break on stocks and depending on where our stock is at the moment I may or may not take a quick profit. By significant I meant of my monthly paycheck, not my overall portfolio. As loyal as I am to my company, I would never trust too much of my investments to their future. =) Thanks for addressing my question JLP and thank you Meg for your thoughts I hadn’t considered that strategy but it seems quite sound.

As for my “significant” contributions to my ESPP. We get a 10% break on stocks and depending on where our stock is at the moment I may or may not take a quick profit. By significant I meant of my monthly paycheck, not my overall portfolio. As loyal as I am to my company, I would never trust too much of my investments to their future. =)

]]> By: Meg http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-189892 Meg Sat, 15 Dec 2007 02:15:23 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-189892 Remember too that when you retire, you're supposed to first use up your taxable savings, then liquidate your tax-deferred assets, then finally start withdrawing from any tax free assets you might have. This allows maximum growth and minimum tax on your portfolio. You spend the taxable assets first and save the ones that are growing and compounding tax free. So if you have significant retirement assets--which I assume you do since you plan to retire at 55 and you also think your tax bracket will drop (which implies most of your income comes from your job)--then your Roth assets may have much longer than 15-20 years to grow and compound. Calculators don't account for these different withdrawal strategies, meaning your Roth advantage may be much greater than otherwise indicated. Also, as JLP pointed out, you will be forced to make minimum withdrawals on your tax-deferred assets when you're in your 70's. If you don't need those funds (because, say, you're still liquidating taxable assets or because you're getting so much social security/pension money that you don't need much from that source) then it would be great to have some assets in a Roth that you don't have to touch. And estate planning advantages to the Roth are significant, an important consideration if you're not planning to run through all your money before you're time here is up. Remember too that when you retire, you’re supposed to first use up your taxable savings, then liquidate your tax-deferred assets, then finally start withdrawing from any tax free assets you might have. This allows maximum growth and minimum tax on your portfolio. You spend the taxable assets first and save the ones that are growing and compounding tax free.

So if you have significant retirement assets–which I assume you do since you plan to retire at 55 and you also think your tax bracket will drop (which implies most of your income comes from your job)–then your Roth assets may have much longer than 15-20 years to grow and compound. Calculators don’t account for these different withdrawal strategies, meaning your Roth advantage may be much greater than otherwise indicated.

Also, as JLP pointed out, you will be forced to make minimum withdrawals on your tax-deferred assets when you’re in your 70′s. If you don’t need those funds (because, say, you’re still liquidating taxable assets or because you’re getting so much social security/pension money that you don’t need much from that source) then it would be great to have some assets in a Roth that you don’t have to touch.

And estate planning advantages to the Roth are significant, an important consideration if you’re not planning to run through all your money before you’re time here is up.

]]> By: Kitty http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/comment-page-1/#comment-189868 Kitty Sat, 15 Dec 2007 00:26:25 +0000 http://allfinancialmatters.com/2007/12/14/reader-question-to-roth-401k-it-or-not/#comment-189868 "I suggest he be careful here. While the stock of the company may be doing great at the moment he is taking a great deal of risk in tying up his salary as well as his investments in a single company." As long as there is no restriction on selling stock, he can always sell as soon as he buys it or sell at certain times. Usually, these plans come with a nice discount - often 15% of stock value. Plus you buy with payroll deduction, so you cost average over a period of time. Occasionally there is a lookback provision in which the value of stock at the time of purchase is compared to that in the beginning of the quarter with you getting the lowest price. This is free money. Additionally, you buy via payroll deduction at different times so you cost average. If there is a restriction on sales, then it's important to look at what the restrictions are. Depends on the plan. “I suggest he be careful here. While the stock of the company may be doing great at the moment he is taking a great deal of risk in tying up his salary as well as his investments in a single company.”
As long as there is no restriction on selling stock, he can always sell as soon as he buys it or sell at certain times. Usually, these plans come with a nice discount – often 15% of stock value. Plus you buy with payroll deduction, so you cost average over a period of time. Occasionally there is a lookback provision in which the value of stock at the time of purchase is compared to that in the beginning of the quarter with you getting the lowest price. This is free money.

Additionally, you buy via payroll deduction at different times so you cost average. If there is a restriction on sales, then it’s important to look at what the restrictions are.

Depends on the plan.

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