Any way to guess what will happen with taxes over the long term? I think if one thinks taxes will be higher in say 20 or 30 years it would make more sense to take the tax hit now and max a Roth 401k. Likewise if you think taxes will remain stable or go down for the long term then one should leverage a regular 401k in favor of the Roth.
Any thoughts or comments?
Try this link for an explanation.
In general, if you think that your tax bracket will be lower in the future, 401k is a better option. If you think your tax bracket will be higher in the future, then the Roth IRA is a better option. However, the good thing about a Roth IRA is that with every other retirement vehicle, you must start taking disbursements at age 70.5, but not with the Roth IRA.
Excellent question!
I don’t think you’ll find a solid answer…lots of opinions and part of it is a good guess.
I put 10% into a 401K. It takes 6% to get the Employer match. I am putting another 5% of salary into a Roth. I think you need to have both…esp if your employer offers a match! Lately I have been thinking of increasing my Roth % but this year I lost one child deduction and will be losing another in '09 so I may want to consider putting more tax free away. There is much to consider.
**If you think your tax bracket will be higher in the future, then the Roth IRA is a better option. **
Hmmm, so is that the tax bracket when taking the money out (when retired)… I would think it would always be lower at that point rather than when you are in your prime earning years.
Yes, it is the tax bracket when you are retired and are withdrawing funds from your retirement vehicles to pay for stuff. You may be at a lower bracket comparatively, but no one knows whether taxes will increase or decrease in the future.
That’s pretty much what I do. The standard answer is to contribute to your 401(k) to maximize the employer match, then contribute to your Roth IRA fully, and then go back to contributing to your 401(k). That you you get the benefit of an instant return from the employee match, and with contributing both to tax deferred and tax free vehicles, you are hedging your bets and you have options no matter if the taxes are higher or lower in the future.
Just remember you all are dealing with the governement…I would take the highest tax benefit today - its a sure thing, there is no telling what is going to happen 20, 30 years down the line.
You’re right but I’m going to bet that taxes are higher in 30 years than they are today.
Although what you get today is your best bet there are other reasons I contribute to the Roth. Not only to hedge my bets but with the Roth I have a whole world of selections open to me…not just the investments that the 401(k) manager offers. And the money that is in the Roth is available to me at any time with out penalty. You do have to pay taxes on the earnings once a withdraw is made.
There is a 10% early withdrawl penalty from Roth IRA accounts for distributions taken before 59.5. There are a few exceptions…
To the OP…contribute to both.
$5K/yr to Roth. 10% of gross pay to 401(k). You will build wealth quickly.
I just went through this, trying to figure out contributing to a roth 401k or a regular 401k. Sat down with a tax guy. Currently I’m in the 28% bracket and am fairly early on in my career - a career where I can expect to max out somewhere between 2-3x what I make now, unless I move back into the city with another high stress city firm. I’m also 30. He said that, based on historical data (which no, I did not confirm), I almost certainly will be taxed higher when i retire. So I’m 100% contributing to roth 401k. it’s a big bite out of my take home, but i don’t need all the extra cash now and I’d like to quit when i’m 60.
For me, it’s a combination of banking on making a lot more in the future and seeing that the country is going to hell in a handbasket and my taxes are gonna go up eventually even if I don’t break into a tax bracket or 2 higher.
However, you can also take out the money that you’ve contributed to the Roth IRA at any point. Let’s say that over time you’ve put in about $20k into a Roth IRA and it is not worth $30k and you are under 59.5. If you want to take out $10k, no penalty. $20k, no penalty. $20,001 is where you will have to start paying the 10% penalty. Also, you can take out money from a Roth IRA for qualified education expenses, up to $10k for a home, and for qualify medical expenses over 7.5% of your AGI.
the things i like to keep in mind are:
when i am withdrawing i will be retired. no work, no income, low tax bracket! right now, high tax bracket.
money i don’t pay in taxes now goes into my savings and grows - compounded.
since i have other investments as well and will have very few bills when i retire (no mortgage, no kids) i can time my withdrawals to get the best tax advantage.
i don’t think taxes will go up on capital gains. people always say we’re ‘going to hell’, i bet they’ve been saying that for 200 years now in this country. well, we aint. if anything we will keep capital gains low. it’s best for the country for people to invest in stocks. it keeps us going strong. plus, i’m a boomer. we’ll be the biggest voting block the country has ever seen. politicians will not f%$#@ with us.
generally speaking, it is always best to pay taxes later and save now. the compounding effect of investing will almost always, in the long term, pay off big time. the trick is you have to save the tax savings and not buy a new bike with it ;).
You might be in a lower tax bracket at retirement, but isn’t the point of saving for retirement ultimately to not be a lower tax bracket once you retire? Think about it: you should have your house paid for, your kids should be gone, your big tax deductions should be gone, so you could be in a higher tax bracket at retirement.
I think the best answer is take advantage of both the roth and the regular 401k. Why don’t you consider splitting your retirement contributions 50/50 between the two accounts, then you cover both bases.
Most importantly, buy good investments, if you don’t it really won’t matter what vehicle your money goes into.
That’s pretty much what I do. The standard answer is to contribute to your 401(k) to maximize the employer match, then contribute to your Roth IRA fully, and then go back to contributing to your 401(k). That you you get the benefit of an instant return from the employee match, and with contributing both to tax deferred and tax free vehicles, you are hedging your bets and you have options no matter if the taxes are higher or lower in the future.
Agreed.
Additionally, do you want to pay taxes now on your contributions of say $500 a month or what that grows to? Likely you will want to maximize your input to the Roth right after you maximize your employer match.
Run the numbers, the Roth is hard to beat.