My company does not have a company match. I will still defer 6% to a pre-tax 401K account, but I think I'm going to pass on the Roth 401K.

I'm gambling that my income tax rate 30 years from now will be lower, based on the fact that I either won't be working, or I'll be the employee of my own corp with the tax advantages that go with that. (Again, presuming that laws don't change that take these benefits away from the little guy. )

What say you?

Quick answer [from (limited) my understanding]:

A lot would depend on your age and current tax rate ... the [primary] difference between Traditional and Roth 401k is when the money is taxed, traditional funds use pre-tax $$$, while Roth's use post-tax.

So ... if you have a ways to go before 59 1/2 and retirement, the Traditional seems the way to go. Pre-tax $$$ build faster than post-tax dollars because you gain in two ways ... the amount of the invested dollar and the savings of the taxes on the invested dollars ... In my case, for every dollar I invest today has the effect of being more like invest $1.35 [At least that's how I've organized my finances]

Hi Kweli:

Hmmm, after benes and parking, I only bring home 75% of my gross. I never get a refund. I have owed every year since I broke 35K.

So it sounds like the traditional 401k is the way to go.

Thanks for your help.

quote:

I never get a refund. I have owed every year since I broke 35K.

Depending on how much you end up owing ... That's one of the untold good things that Black folks [including my wife] don't seem to wanna hear. Refunds only mean that you gave the government an interest free loan that we'll only give back to you if you ask the right questions the right way.

But take heart, with your new house comes a voat load of deductions. And tell H&R Block to kiss your financially literate ass. Go out and get Turbo Tax [the same tax prep program that H&R Block and Hewitt use] and do your taxes yourself ... it'll take maybe 4 hours, including organization time.

Uh-oh, he said the H-word.

My sister recently received a letter from IRiS saying she owes an additional $4K due to a mistake. And I do believe that she mentioned that H&R prepared her return. She is being surprisingly calm about it.

I've never had anyone prepare my taxes before. I'm a Kiplinger TaxCut girl myself. This year I'll go with whichever one (TaxCut or TurboTax) has a MAC version.
I'm not picky.

quote:

My sister recently received a letter from IRiS saying she owes an additional $4K due to a mistake. And I do believe that she mentioned that H&R prepared her return. She is being surprisingly calm about it.

As she should be ... The one and, in my value, only benefit to using the H Boys/Girls is their preparation accuracy guarantee.

Both of these subjects are near and dear to my heart. Many Afro-Amricans do not understand the difference or the full rationale for these two retirement vehicles being a part of our planning for the future. My tax firm has to address this issue from time-to-time.

I would be delighted to give insight.

Bill C

Okay Bill, spill it. As the resident financial planning expert ... you should take the lead on a financial literact thread.

Well, I know a little bit ... I am far from an expert and have gained much of my knowledge from reading and doing the wrong thing.

Hello Kweli4Real!

I plan to do just what you suggest as the new tax season approaches. But as you may have read in my related posts, our national government is almost in turmoil without an operational budget for government agencies to conduct business.

While our national affairs are hemorrhaging over the budget haymaker we are witnessing, congress applied a bandaid. The government would have run out of operating funds by Friday. So congress appropriated just enough money for the government to stay in business ONE WEEK longer!!! Maybe the holiday break will give incentive for the sparring factions to get serious about a budget that includes the Afro-American-USDA legislation, a pet cause of mine on behalf of many of my clients.

I have said all of that to let you know in the next several days I will do a point-by-point comparison between the Roth IRA (the better choice in my opinion for some wage earners) and the traditional IRA.

Meanwhile, if you would, any information you could pass on about the budget I might miss would be welcome. Stay tuned.

Bill C

Hi Bill C:

I'm all ears for this. Thanks for your input. I'm trying to get settled before my first paycheck of 2008. Don't want to see any of my pay increase in my net so I want to stash it off someplace.

I have an answer to alleviate all the problems the U.S. government has imposed on all us folks that are of age and will have to be proactive in creating our own retirement funding: I'm not going to retire.

That's right. I said it. I'm not going to retire. In the next 10 years the administrative staff of nearly every college and university will be at if not beyond retirement age. I plan on spending my twilight years advising, writing books, and consulting.

Think about it. There really isn't any need to fully retire unless health problems arise that leave you no other choice. Even then you still have to live, so the best way to go is to put yourself in a position where you can work most comfortably, where the burden is placed more on cognitive instead of physical capacities.

Now, don't look at this as some kind of cockamamy idea. There are colleges and universities all over the country that are full of faculty and administration that are in their early 50's to late 70's and easily collecting a high five to low six figure salary just because they have a doctorate degree. Consulting is also the way to go with a doctorate degree as many people have chosen also to serve on various boards or do consulting on the side to supplement their already well-to-do salaries. Keep in mind that many of these people are already collecting from their prospective teacher's retirement seeing as many administrators originated from the classroom.

This message has been edited. Last edited by: Romulus Burnett,

I'd rather be hated for what I am than loved for what I'm not. - Chuck D.

You might not be able to retire. The baby boomer generation is headed into retirement and nursing homes. There will be a large number of services needed by them as well as jobs left open by them...

but then again, that's when immigration will come in handy... to fill the labor gap...

I know one damn thing is for sure. Y'all ain't gonna see my old ass greetin' y'all stankin' asses at the entrance to Wal-mart.

quote:

Originally posted by Romulus Burnett:
I know one damn thing is for sure. Y'all ain't gonna see my old ass greetin' y'all stankin' asses at the entrance to Wal-mart.

How do you know we'll be stankin? We'll probably have our home health aides to put clean Depends on us before going to WalMart

quote:

Originally posted by Romulus Burnett:
I know one damn thing is for sure. Y'all ain't gonna see my old ass greetin' y'all stankin' asses at the entrance to Wal-mart.

Dude, I don't currently shop at Wal-mart and really don't want to start.

Hence, I am all ears for Bill C., Kweli, Gambit, AC9311, MBM and anyone else with any financial tidbits I can use.

P.S. I don't 'stank' either.

Perhaps you're already familiar with the Roth IRA and want to know how the Roth 401k/403b stacks up. Here's a rundown of the major differences.

No income limitation

The Roth IRA isn't available to taxpayers with income above certain levels. For unmarried filers, the contribution limit begins to phase out at $101,000 and is completely eliminated at $116,000, and for joint filers the contribution limit is eliminated as joint income moves from $159,000 to $169,000 (figures are for 2008). These limits shut the door on the world of tax-free retirement savings for many taxpayers.

The Roth 401k/403b opens that door, because these limits don't apply to those accounts. If you're eligible to participate in your employer's 401k or 403b program, and the employer offers Roth accounts, you can make this choice without regard to your income level.
Higher limits

The dollar limits for 401k contributions are much higher than the limits for IRAs. Assuming you're otherwise eligible, in 2008 you can contribute up to $5,000 to an IRA (including a Roth IRA), or $6,000 if you're at least 50 years of age. For 2008 the general limit on contributions to a 401k or 403b account, including a Roth account, is $15,500, or $20,500 if you're at least 50 years of age.

Various other limitations may prevent you from contributing the maximum amount to a 401k or 403b account, but most people who are eligible for these accounts will be able to set aside more money for retirement than they would if they relied solely on an IRA.

Matching contributions

If your employer provides matching money for 401k or 403b contributions, you'll get that match regardless of whether you put your money in a traditional account or a Roth account. The matching money goes into your traditional account even if you put your own contributions into a Roth account — but even in the traditional account, this matching money is adding to the wealth you'll have in retirement.

Investments

You can set up a Roth IRA just about anywhere you want, and that means pretty much the entire world of investments is available to you. In a Roth 401k/403b, just as in a traditional account, you have to choose from among the investments your employer offers. Nearly all companies make sure the choices include some high quality mutual funds that are suitable for retirement savings, and it may actually work to your advantage to be able to focus on a narrower range of choices. Also, your employer may be able to offer some items, such as a stable value fund, you wouldn't be able to put in your IRA.

One thing to watch out for. Some people load up their 401k account with stock of the company where they work. It's okay to own some of your company's stock, but putting more than 10% of your retirement savings into a single stock, no matter how good that stock might be, is hazardous to your wealth.
Access to your money

You should plan to keep hands off your retirement money until you're retired, but emergencies do happen. If your money is in an IRA, you can take the money any time you want, although you'll give up tax benefits and possibly pay an early distribution penalty. In a 401k account, you may not be able to take a distribution while you're still employed at the company that maintains that retirement plan, although many employers allow hardship distributions under specified circumstances.

In some situations you may want to borrow from your retirement account. This is not allowed at all for IRAs, although some people use the 60-day rollover period as a way to gain access to the funds for a short period of time. Many employers allow workers to borrow from their 401k or 403b accounts, though. This isn't necessarily good financial planning, but can be a way to get through a short-term crunch without depleting your account.

Minimum distribution rules

The minimum distribution rules that apply to traditional IRAs don't apply to Roth IRAs. This is a big advantage for people who don't need to draw down their IRAs as fast as those rules would require. The longer you can keep your money in an IRA, the better. The minimum distribution rules do apply to Roth accounts in 401k or 403b plans, but this is not a significant problem. When you retire, you can roll your Roth 401k or 403b account into a Roth IRA where the minimum distribution rules won't apply.

No recharacterizations

If you contribute to a Roth IRA, you can change your mind later about the type of IRA that received the contribution. This is called a recharacterization. The main purpose of this rule is to help people who learn after contributing to a Roth that their income is too high to permit that contribution. Yet a recharacterization can be used for other purposes. For example, you may simply find that the deduction you would get from contributing to a traditional IRA is more valuable than you anticipated, and choose to recharacterize the contribution for that reason.

When you contribute to a 401k account, your choice between a traditional account and a Roth account is irrevocable. You can change your choice for future contributions, but you can't undo your choice for contributions you already made as you can when you contribute to a Roth IRA.

Five-year requirement

The five-year requirement to obtain qualified distributions from a Roth account in a 401k or 403b plan is similar to the requirement for Roth IRAs, but there are important differences. You should be aware that different Roth 401k or 403b accounts can have different holding periods, and in a rollover to a Roth IRA, the aging of the 401k or 403b account does not carry over to the IRA.

details: Five-Year Requirement for Roth 401k/403b
Nonqualified Distributions

If you take a nonqualified distribution from a Roth IRA, your contributions come out tax-free before you have to pay tax on distributions of earnings. If you take a nonqualified distribution from a Roth 401k or 403b account, part of that distribution will be taxable (based on the portion of the account that represents earnings) even before you've withdrawn all your contributions.

Source: Fairmark