Comments on: Roth 401(k) for People Who Contribute the Max

By: Mark

Mark — Mon, 07 Sep 2009 16:52:46 +0000

Scott,
You said:
"So the person who wrote the post about you should invest in a Traditional 401 over a ROTH 401k is simply WRONG and should not be giving financial advice!"

Can you clarify why investing in a ROTH 401k is better than investing in a Traditional 401k.

To me, investing into a Traditional 401k using pre-tax dollars makes more sense. Am I missing something here?

Thank you.

By: Scott

Scott — Wed, 27 Aug 2008 14:51:47 +0000

Whoever thinks taxes are going to be lower at in the future is just not thinking, infact anyone thinking this, in my opinion has lost their mind!

We are at a ALL time low over the last 30 years, as far as tax brackets. Right NOW we pay less taxes they we ever have in 30 YEARS!! ( fedral taxes) THAT IS A FACT!

The IRS and congress are going to face a HUGE problem in the next 15 years with all the baby boomers. HOW do you think they are going to pay for all of SS benefits? How do you think they are going to pay for all the medicare? The list goes on and on……..

I will tell you how………MORE TAXES!! Its a FACT and I garantee reguardless of who becomes president TAXES ARE GOING UP.

So the person who wrote the post about you should invest in a Traditional 401 over a ROTH 401k is simply WRONG and should not be giving financial advice!

By: TFB

TFB — Tue, 01 Jul 2008 07:25:00 +0000

Silicon Shadow – That's a good point. Thank you for adding to the discussion. If someone is struggling to contribute enough for the full match, going Traditional is certainly a lot easier on the budget than going for Roth.

By: Silicon Shadow

Silicon Shadow — Mon, 30 Jun 2008 23:44:00 +0000

Good post. This topic is often lamented but I think you captured the issues rather well. One element you didn't mention is matches, which many 401k's have. Matching contributions are another way of saying "free money" and you are usually foolish to pass it up. So if you aren't maxing out — that means you are likely missing a match $. Since its cheaper to put a dollar into traditional, but you still get the match, you should always contribute the full match amount at a minimum — in the traditional. If you can afford the full match amount in Roth, then the conversation reverts to what you've put forward in your posts. For my my employer matches a % of the entire contribution amount, which means I have to hit 15500 in contributions to get the full match. So its traditional first and then fill with roth if you want to "save more" (as you suggest).

By: TFB

TFB — Tue, 03 Jun 2008 06:44:00 +0000

Jim – $41k is made up of $31k to two 401k's plus $5k each to two IRAs. If you are over 50, there's another $5k each in catch-up contributions to 401k's. Some people are eligible for Roth IRA. Some only eligible for non-deductible traditional IRA. You may not want to do non-deductible Traditional IRA but I still do it because additional tax-deferred space is still useful.

By: jimslade

jimslade — Tue, 03 Jun 2008 05:24:00 +0000

I'm going to expose my ignorance here, but how does the max get to 41k? I understand that my traditional 401k limit is $15.5k, so my wife and I can contribute up to $31k. I didn't think that I can contribute to an IRA or anything else if I maxed my 401k. I have an IRA, but it is all pre-tax contributions, and I don't want to mix pre-tax and taxed income in that account… am I missing something?
thanks in advance…

By: TFB

TFB — Tue, 27 May 2008 06:49:00 +0000

serbeer - Unfortunately they don't make it easy for everybody. You have to take both posts into consideration. Any rule of thumb will be overly simplistic but if I have to make one, I'd say,

1) If you are not contributing to the max (that's 90% of people out there), you are likely better off with the Traditional 401k, unless you fall into one of the exceptions (have good pension, expect substantially higher income, etc.)

2) If you are contributing to the max, first make sure you create enough taxable income to fill in all the lower brackets. Just Social Security and dividends and capital gains from your taxable accounts are probably not going to be enough. Exactly how much you will need in the Traditional accounts is going to be a guess but make your best guess. After that, the contributions can go to Roth.

By: serbeer

serbeer — Tue, 20 May 2008 17:01:00 +0000

TFB,
thank you for this very interesting post. I am having hard time trying to reconcile it with the previous post on the subject though.

Are you, basically, saying that most of the people who don't contribute to the max would be better off contributing to traditional 401K--but those who contribute to the max are better off going Roth way as long as they don't expect their tax bracket to be more than ~7% lower in retirement?

Is it a good rule of thumb or it is overly simplistic? Is there better one you think?

Thanks!

By: Anonymous

Anonymous — Fri, 16 May 2008 17:02:00 +0000

If you max out all your tax favored contributions then the amounts over the max which go into your taxable accounts will fill in the lower brackets when you retire. You don't need to increase traditional contributions in lieu of Roth to get this advantage unless you are planning to depend 100% on your tax favored accounts in retirement.

By: JoeTaxpayer

JoeTaxpayer — Fri, 16 May 2008 02:15:00 +0000

Excellent post. I wrote on this topic on my web site at http://www.joetaxpayer.com/toomuch.html
and made similar observations, that one should save enough to fill in those lower brackets at retirement.
Joe