Question on Roth 401(k) vs. Employer Traditional 401(k)????

I am currently contributing 6% to my 401(k) so that I can take full advantage of the match my employer offers. I have additional funds avalible that I would also like to sock away for retirement. I am a 24 year old that pays around 33% income tax. Due to this, is it smart to put additional funds in Roth 401(k) and pay high taxes, or put the extra funds in my traditional 401(k) and defer my taxes, hoping to get in a lower tax bracket? Please help!!!!

Excellent question! As you know, traditional 401(k) allows you to save taxes now whereas a Roth saves taxes later. If you do the math and assume you will be in the same tax bracket when you retire, both are equally beneficial. There are a few considerations.

1) To put $1000 into a Roth, you need to earn $1500 because you lose $500 in taxes. To put $1000 into a 401k, you only need to earn $1000. So, if you have $15,000 to invest, you may be better off with the 401k since all $15,000 gets invested. If you are willing to "invest" more, then the Roth technically lets you invest $22,500 of income. You lose $7,500 to taxes, but the $15,000 goes into the Roth and starts to grow tax-free. By the time you take it out, the $15,000 in the Roth will be worth more after-tax than the $15,000 in the 401k. The caveot being you need to use more of your income to do the investment.

2) If you retire and all of your money is in tax-deferred accounts (401k), then everything you pull out is taxable. If everything is in a Roth, then everything is not taxable. Why not do what I'm doing and have some in each? Then, you can pull from the taxable account until you reach some sort of threshold like a certain tax bracket or whatever. Then, if you need more money, you can pull from the tax-free account without increasing your tax liability.

3) I'm not too sure about Roth 401(k), but one nice thing about having money in a Roth IRA is you can pull out the contributions before you retire and not pay tax or penalty on it. It is sort of like a back-up emergency fund. You certainly don't want to have to pull money out of it, but it is a lot better than tapping your regular 401k. I believe the Roth 401k has the same pull-out benefits that the Roth IRA has.

4) Sometimes, it is nice to have a lower AGI. Sometimes your income is just a bit high to qualify you for some tax benefit. If that is the case, you may want to favor putting money into the regular 401k over the Roth 401k.

So, there is a lot to consider. Everyone's tax situation is different. My knee-jerk reaction is to puit 50% in each. If your employer drops the Roth 401k, max out the regular 401k and put as much as you can into your Roth IRA. If you are in the 33% bracket, you probably can't put into the Roth IRA. If you still have left over income you want to invest, you may consider a regular IRA. The contributions won't be tax-deferred, but the gains will.

Good luck!

max out the traditional and then put the rest in a roth. As long as you are not paying on something that has a high interest on it.

Oh, this is a tricky question. To answer this correctly, you'd have to know what tax bracket you'll be in when you retire in 30 - 40 years ... a level of clairvoyance that surpasses even Star Jones.

You and I are in a similar situation. I am in one of the upper tax brackets and have a regular 403(b). However, next year my employer will offer a Roth 403(b). For me, however, my adjusted gross income is right near the cutoff for contributing the full amount to a Roth IRA. So, if I did not get the tax deduction from my regular 403(b), I would be ineligible to participate fully in a Roth IRA. So, in my situation, I am probably better off not doing a Roth 403(b), even if it means paying taxes on it in retirement. You may want to consider this situation when factoring your answer. Also, will the deduction from your regular 401(k) allow you to move into a lower tax bracket? In other words, if you contribute to the Roth 401(k), will it place you in a higher tax bracket than what you are in now? Consider this before making your decision.

Other than that situation, unless you need the tax break this year, you are almost always better off using a Roth 401(k). Many deaces of investing can add up to a lot of earnings, representing a huge tax bite if this were held in a regular 401(k). In the long run, you'll probably make more total money this way because of the huge tax savings in retirement.

Or course, if congress decides to repeal the Roth's special tax treatement, we are all screwed.

(Legally, you are allowed to contribute to a regular 401(k) and a Roth 401(k) in the same year, provided that the combined contributions do not exceed $15,500 in 2007. However, your employer may require you to pick one or the other. Still, it doesn't hurt to ask if this option is available.)

I am also curious to know if you can pull out Roth 401(k) contributions without penalty, a question that TaxMan posed. I bet you that the IRS legally allows this but that your employer will probably not. When it comes to retirement accounts, often times it is the restrictions of your employer, not the IRS, that cause the hassles.