Wouldn't it make more sense to contribute to a ROTH 401(K)?

I was watching some suze orman videos (lol) and apparently we are living in an era with the lowest income tax rates ever. So, that combined with the huge national debt, it only seems logical that tax rates will go up in the future.

Thus, it would be prudent to take advantage of the "low" tax rates and choose to invest post-tax dollars into a ROTH 401K as opposed to a traditional one, in case the tax rates are much higher when I'm 65.

Am I missing something here? I also have a ROTH IRA if that matters.

From what I understand is, as a retiree, your income, and thus tax bracket, can potentially be zero. In this case, investing pre-tax dollars now into a traditional 401(k) will save you money as when you withdraw it, you could be in the 0% tax bracket assuming you have no other income. I'm curious as well what others have to say.

Traditional: Save (insert your tax bracket %) now, withdraw tax free assuming you have no income in retirement. Not sure how investment income will affect this, a year out of school and I start forgetting!

Roth: Pay (insert tax bracket here) now, save nothing in taxes when you retire assuming no income.

There is a school of thought that any opportunity to defer tax is a good one = putting money in a 401(k) or traditional IRA now means you avoid this year's taxes.

Balance that against the theory that taxes are inevitably going to rise, which might sway you to instead put in after-tax dollars at today's relatively low rates on the premise that all of that growth will later be tax-free. Of course, you have to think that Congress might just change the rules and you're fucked, regardless of the future tax rate.

The better question for you might be whether to utilize your employer's traditional 401(k) program, if it exists. These usually have a matching component - that is free money. You should max out that option before you start talking about any sort of IRAs.

Originally Posted by Benzito

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There is a school of thought that any opportunity to defer tax is a good one = putting money in a 401(k) or traditional IRA now means you avoid this year's taxes.

Balance that against the theory that taxes are inevitably going to rise, which might sway you to instead put in after-tax dollars at today's relatively low rates on the premise that all of that growth will later be tax-free. Of course, you have to think that Congress might just change the rules and you're fucked, regardless of the future tax rate.

The better question for you might be whether to utilize your employer's traditional 401(k) program, if it exists. These usually have a matching component - that is free money. You should max out that option before you start talking about any sort of IRAs.

Yeah, my employer matches 100% of my contribution up to 7%. Will definitely take advantage of all that. Not sure if I want to contribute 7% or 8% or 10%, for that matter.

Wow . . . a 100% match means you sink in $5,000 a year and you get $10,000 back. You'll never get that return in the market!

Look at the wikipedia article or talk to an accountant about Roth 401(k) accounts and some of the tax issues pertaining to the employer match. It isn't exactly as clean cut as one might think.

Originally Posted by Benzito

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Wow . . . a 100% match means you sink in $5,000 a year and you get $10,000 back. You'll never get that return in the market!

Look at the wikipedia article or talk to an accountant about Roth 401(k) accounts and some of the tax issues pertaining to the employer match. It isn't exactly as clean cut as one might think.

Yeah.. I'm extremely fortunate that my employer matches 100%. I thought all employers did, but the norm seems to be 50%!

Originally Posted by GreenFrog

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Yeah.. I'm extremely fortunate that my employer matches 100%. I thought all employers did, but the norm seems to be 50%!

75% of up to 6% salary (so 10% total) for the place I'm going to. Sad that that's a 'good deal' these days...

I actually put in 5% of my salary and my employer puts in 8%. That's a 160% match! You'd better believe I contribute the maximum.

I also contribute to a Roth IRA, but I'm not convinced that my tax rate will be lower in retirement, so I'm not aggressively pursuing the idea of a roll-over Roth IRA (I just changed employers last year and I'm in the process of rolling over a 401(k) into an IRA).

Roth makes a lot of sense if you expect tax rates on normal income to increase in the future, however there are some issues at hand. Taxes on long term capital gains could potentially be higher than normal income taxes if the money you are withdrawling from your 401k at retirement is less than you expect to be withdrawling per year. So it depends on how much you are withdrawling per year at retirement and normal income taxes vs. capital gains tax.

I just do all pre-tax because I enjoy the write-offs. I am not really thinking too hard about retirement because a) I don't really plan on retiring ever and b) inheritence.

Just a note to those enjoying employer contributions to their defined contribution retirement plans: make sure you study the vesting schedule for employer contributions to the plan, it is an easily missed cost of switching employers.

I suppose you could say that I am hedging...I max a roth IRA but make traditional 401k contributions. My employer match only goes into traditional...so if I were to contribute to a roth 401k, I would end up with two 401ks (roth with my money and trad. with employer match).

One thing to consider is that the roth options have an income limit...at some point you will no longer be able to contribute to them if you make above that cap.

Either way...tax advantaged accounts are nice. I can go in and out or hold things like high yielding REITs and not have to worry about the tax issues (REITs don't have to pay corporate income tax but their dividends are not taxed at the dividend rate).

This guy: http://www.iwillteachyoutoberich.com/ has a lot of very good content for people in their early 20s getting a handle on their money. The only problem is the blog is now focused 95% on entrepreneurship so you have to sort of look into the archives for the content (or buy his book, which is good). The posts about setting up automation and sane investing strategies (the kind that don't make good cocktail party talk but provide good long run results) are very good.

Originally Posted by thinman

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I actually put in 5% of my salary and my employer puts in 8%. That's a 160% match! You'd better believe I contribute the maximum.

I also contribute to a Roth IRA, but I'm not convinced that my tax rate will be lower in retirement, so I'm not aggressively pursuing the idea of a roll-over Roth IRA (I just changed employers last year and I'm in the process of rolling over a 401(k) into an IRA).

How does that work?

Your employer matches what you contribute, and MORE, up to 8%?

So if you contributed nothing, they would still contribute 8%?

Originally Posted by otc

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I suppose you could say that I am hedging...I max a roth IRA but make traditional 401k contributions. My employer match only goes into traditional...so if I were to contribute to a roth 401k, I would end up with two 401ks (roth with my money and trad. with employer match). One thing to consider is that the roth options have an income limit...at some point you will no longer be able to contribute to them if you make above that cap. Either way...tax advantaged accounts are nice. I can go in and out or hold things like high yielding REITs and not have to worry about the tax issues (REITs don't have to pay corporate income tax but their dividends are not taxed at the dividend rate). This guy: http://www.iwillteachyoutoberich.com/ has a lot of very good content for people in their early 20s getting a handle on their money. The only problem is the blog is now focused 95% on entrepreneurship so you have to sort of look into the archives for the content (or buy his book, which is good). The posts about setting up automation and sane investing strategies (the kind that don't make good cocktail party talk but provide good long run results) are very good.
Thank you kind sir. I imagine at age 59.5, you will withdraw a very luscious lump of savings from your retirement accounts. Shall we head to Fort Lauderdale, FL, and ride around in Ferraris with our silver gray hair (if we even have any by then) dancing around in the air as we trail by poor 20-year old and leave the symphonic sounds of a high-revving V8 engine?

Originally Posted by otc

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One thing to consider is that the roth options have an income limit...at some point you will no longer be able to contribute to them if you make above that cap.


Not true. My employer offers a Roth 401k that I max out annually and my annual salary is above the federal income max. Roth IRA, yes, you wont be able to contribute after a certain income. Roth 401k, you can make as much as you want and still contribute.

FWIW, I am also a financial advisor by profession.

Originally Posted by GreenFrog

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How does that work? Your employer matches what you contribute, and MORE, up to 8%? So if you contributed nothing, they would still contribute 8%?
Participation is actually required, so I put away 5%, they put in 8%, and then I'm also allowed to contribute to a 403(b), which I do, but not up to the maximum I'm allowed. I hate paying taxes on my earnings, but I do need some money to live on. Depending on the house I buy (I'm currently shopping), I may bump my 403(b) contribution to the max, though. Edit: For all the youngsters on the board, I would advise starting to save for retirement as early as possible. Compounding over time will dramatically reduce the amount you'll need to save when you hit your 30s, 40s and 50s and have other expenses, like kids.