Comments on: Roth 401k: What Is It?

By: Contribute to Retirement Accounts Before End of the Year | Cash Money Life

Contribute to Retirement Accounts Before End of the Year | Cash Money Life — Wed, 12 Nov 2008 12:47:37 +0000

[...] made with pre-tax income and can substantially lower your tax bill (contributions to Roth IRAs and Roth 401(k) plans do not lower your tax bill). The tax deduction is a nice incentive to save money for retirement. I [...]

By: Madison

Madison — Sun, 04 May 2008 19:09:05 +0000

@ Gary: Yes, we have been maxing out both the company plan (traditional or roth 401k) and our Roth IRAs for many years without a problem.

The rules for the company plan are limited by any highly compensated employee rules (your company will let you know if you are affected) and the rules for the Roth are based on the MAGI (like you specified above).

As long as you follow the rules for each one, you should be fine to use both!

By: Gary

Gary — Thu, 01 May 2008 16:06:11 +0000

My company offers both Traditional 401(k) and Roth 401(k) plan(s). I know that the total contribution limit (for 2008) for any combination of both plans is $15,500 ($20,500 if over age 50). What I’d like to know is: Can I “max out” on the combined limit at my company and still make a separate Roth IRA contribution (up to $5,000 / $6,000 if over 50) apart from my employer as long as my modified AGI is under the limit ?

By: Smart Spending

Smart Spending — Wed, 19 Mar 2008 14:17:03 +0000

Grow your investments one snowflake at a time…

This guest post comes from Madison DuPaix at My Dollar Plan. Once you establish an investment plan, you can contribute regularly and watch your portfolio grow. What if there were a way to give it an additional boost without much extra effort? That’s …

By: Personal Finance Blogosphere Best of 2007 | Moolanomy

Personal Finance Blogosphere Best of 2007 | Moolanomy — Tue, 15 Jan 2008 15:29:56 +0000

[...] Roth 401k: What Is It? @ My Dollar Plan “The Roth 401k plans are relatively new and many people haven’t heard of them yet. Employers are slowly starting to offer them to employees. Let’s explore how the Roth 401k works, the benefits over the Roth IRA, and why it is taking time for employers to offer them!” [...]

By: Madison

Madison — Mon, 07 Jan 2008 04:05:54 +0000

@JD:
Great question. I can’t answer completely because I don’t know all the details about your company (number of employees, compensation, etc.). However, I do feel that the Roth 401k is a great plan for many companies to offer for their employees as some people may want to participate in it. It would be a good plan to offer in addition to a traditional 401k, as some employees will want to remain with it for the pre-tax contributions.

Here’s some considerations for your company:
-Cost to administer additional plan.
-Interest in plan. Taking an informal poll before setting it up would be a great idea.
-Meeting the regulations (keeping the plans qualified, monitoring highly compensated employees, etc).

Hopefully that helps you get going in the right direction.

By: JD

JD — Sat, 05 Jan 2008 19:32:43 +0000

I don’t know much about these retirement plan options. I hope you can help me out and let me know if I should be doing something differently. I earn a high income of around $500,000 per year. I don’t put money into any type of IRA (Roth or Traditional) because of the income limits. I contribute fully to my company 401k right in the beginning of the year, so I get the company match earlier. We have a traditional 401k. I work for a small firm where virtually everyone (I think even our receptionist) earns more than the IRA income limits. Would it make sense for us to go this Roth 401k route? If so I’d like to send a note on it to the guy who manages these things for us. I feel like an idiot asking this question but I don’t know much about the rules and regulations around retirement plan options. I work in finance, but very different sort of thing (wall street).

By: Madison

Madison — Sat, 08 Dec 2007 20:11:29 +0000

@ Kris: Lucky you! You are right, it’s a lot of taxes to swallow up front. Great pros and cons.

@Cavemanus: Let me address each point separately;)

1) Agreed, your taxable income is higher. However, if it is lower than you anticipate it being in retirement, you will come out ahead. Unfortunately nobody knows which way taxes will go, but I’d be willing to bet we won’t be seeing 15% tax brackets in the future.
2) The deferral limits for both the traditional and Roth 401k are the same, so you aren’t limited to contributing less money. Mathematically, assuming tax rates are the same now and in the future, both ways give you the same amount in retirement*. Like above, it all depends which way tax rates will go.
3) I’m not sure where you are going with this one. Because the Roth 401k (and IRA) are tax free, basis doesn’t matter, since the gains are not taxed. Is there a reason you are focused on lowering the basis?
4) Great point! It does add another element of paperwork. I’m hoping the plan administrators will find an efficient way to do this for employees that isn’t too complicated.
5) Agreed. The limited choices that many plans offer won’t allow people to use them as efficiently as a Roth IRA.

All very good points for readers to think about. I’m still crossing my fingers to get access to one because I believe taxes will be going up, I don’t mind tracking another account and we have access to some funds that will work will with my asset allocation strategy. It will vary for each person and their circumstances.

*I don’t completely agree with the math that equates using either the traditional or Roth, but more about that in another post!

By: Cavemanus

Cavemanus — Sat, 08 Dec 2007 15:42:57 +0000

For the average person, I would not recommend using a Roth 401k for the following reasons:

1) Your taxable income becomes higher. For example, if you contributed 15% to a regular 401k, your taxable income would be 17.6% lower than with a Roth 401k. If you made $99,000 in income and were single in 2006, your federal tax would have been $21,824, a 22% tax rate if you contributed to a Roth 401k. With a regular 401k and a 15% contribution, your taxable income would have been $84,150 and your tax $17,680 (a 21% tax rate). That is a 23.4% difference in tax liability off of the same paycheck.
2) You are putting less money to work for retirement.
3) Your employer match does not help you lower your cost basis for individual funds in a Roth 401k because they are not invested in the Roth.
4) If you do contribute to a Roth 401k and have a company match, you will have to track multiple accounts.
5) With a Roth IRA, one benefits from having higher yielding securities because dividends and capital gains are not taxed. Ever. In a company’s Roth 401k plan, one is not as likely to have higher yielding securities available in a way that allows them to remain diversified and benefit from a greater tax free yield.

These are just some of the reasons I would not use a Roth 401k. I prefer to use the regular 401k and then manage a Roth IRA in a brokerage account where I have access to all securities available. My Roth IRA is diversified with fifteen stocks, funds and ETF’s and yields 5.2%. The account has a CAGR of 12% over the past five years.

By: Mrs. Micah: Finance for a Freelance Life / Carnival Retrospective

Mrs. Micah: Finance for a Freelance Life / Carnival Retrospective — Fri, 07 Dec 2007 21:12:50 +0000

[...] just learned from My Dollar Plan that there’s a Roth 401(k). What [...]

By: kris

kris — Thu, 06 Dec 2007 01:46:11 +0000

My employer is offering a Roth 401(k) next year as well. I spent some time evaluating the pros and cons (see link below). The tax diverisification of the Roth 401(k) is appealing, but its tough to give up the huge tax deduction of $15,500 afforded by the regular 401(k).

http://thefinancialengineer.bl.....tible.html

By: Ultra ETFs, The 80/20 Rule, Buy Generics @ The Carnivals

Ultra ETFs, The 80/20 Rule, Buy Generics @ The Carnivals — Wed, 05 Dec 2007 20:37:29 +0000

[...] Roth 401k: What Is It? @ My Dollar Plan [...]

By: The Carnival of Personal Finance #129 | Cash Money Life

The Carnival of Personal Finance #129 | Cash Money Life — Mon, 03 Dec 2007 12:44:31 +0000

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By: » Weekly Roundup - Christmas Tree Edition @ fivecentnickel.com

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