wiirenet
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Location: near Chicago, IL
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| Pre-Tax 401K or Roth? |
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I noticed in my Fidelity company retirment site we have the option of contributing to "Pre-Tax" (which I assume means normal 401K) and "Roth."
I did some research and first of all can't tell the difference between Roth 401K and Roth IRA. My fidelity website that I log into just says "Roth" and I don't know which that is.
I read that Roth is better for someone who thinks they will be in a higher tax bracket when they retire, meaning they are still working.
So 401K is for someone that wants to retire 100% and have no income, and Roth is for someone who will have an income, is that the basics?
I just am trying to figure out what is better for me. I am 25, I believe my salary is about 35,000 and I only have $2,900 in my 401K at 5% and am wondering if I should put something in the 'Roth' option on my Fidelity site.
(I plan to raise the 5% so I don't know if I should put it in Roth or just raise the 401K higher) Thanks!
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Fri Nov 02, 2012 5:19 pm |
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oldguy
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Location: arizona
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A 401k Roth and a Roth IRA are basically the same, ie, they are both funded with posttax money. The two 401k accounts are managed by your employer and the max limit on the two combined is $17,500 per yr. The Roth IRA is not associated with your job, it is an account that you open on your own, the max limit is $5000 per yr.
When you are a low income worker, use the Roths and take the tax break in retirement. When you are a high income worker, use the Traditional 401k to take the tax break now, and pay the tax after retirement.
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Sat Nov 03, 2012 12:47 am |
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clydewolf
Senior Member
Cash: $ 50.25
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Joined: 27 May 2012
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| Re: Pre-Tax 401K or Roth? |
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quote:
Originally posted by wiirenet
I noticed in my Fidelity company retirment site we have the option of contributing to "Pre-Tax" (which I assume means normal 401K) and "Roth."
I did some research and first of all can't tell the difference between Roth 401K and Roth IRA. My fidelity website that I log into just says "Roth" and I don't know which that is.
I read that Roth is better for someone who thinks they will be in a higher tax bracket when they retire, meaning they are still working.
So 401K is for someone that wants to retire 100% and have no income, and Roth is for someone who will have an income, is that the basics?
I just am trying to figure out what is better for me. I am 25, I believe my salary is about 35,000 and I only have $2,900 in my 401K at 5% and am wondering if I should put something in the 'Roth' option on my Fidelity site.
(I plan to raise the 5% so I don't know if I should put it in Roth or just raise the 401K higher) Thanks!
Wiirenet,
Oldguy has given you a good rundown on the 2 types of 401k plans.
It comes down to when do you want to pay the income tax on your 401k savings?
In the Traditional 401k when you make a contribution to the plan the tax on your contribution is deferred until you take a distribution from the plan.
In the ROTH 401k you pay income tax before you make your contribution. When you take qualified distributions from your account those distributions are tax free.
At your age you are likely in a lower tax bracket. If you are in a 15% or lower tax bracket, the ROTH 401k is a good choice for you.
Over the years as your tax bracket increases you can change to the Traditional 401k.
You can also make your contributions part to the Traditional 401k and part to the ROTH 401k.
When your employer makes a matching contribution to the 401k, that matching contribution is always to a Tax Deferred Account.
No matter which 401k plan you choose, be sure to name a person as beneficiary to your plan.
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Sat Nov 03, 2012 8:47 pm |
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nsmith508
Member
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Joined: 08 Nov 2012
Location: Massachusetts
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Just do both a 401k and a Roth. Then you don't have to worry which is better. Max them both out and think about something else.
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Thu Nov 08, 2012 10:41 pm |
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Publius
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Location: Georgia
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If the OP is asking about a ROTH 401K, he cannot max both of these out. The maximum amount total that can be employee contributions is 17,000 in 2012 (17,500 in 2013, I believe).
I have both options at work, my wife has only the traditional 401K option. We put pre-tax money into her traditional and post tax money into my ROTH 401K. I think of this in much the same way as I think of the funds themselves -- We have no way of knowing what the tax rates will be in 30 years, but we can play both sides of the fence by using both types of accounts. We are, in effect, diversifying our tax treatments much the same way that we diversify our investments across multiple sectors.
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Fri Nov 09, 2012 7:52 pm |
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littleroc02us
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quote:
Originally posted by oldguy
When you are a low income worker, use the Roths and take the tax break in retirement. When you are a high income worker, use the Traditional 401k to take the tax break now, and pay the tax after retirement.
What's your thought process for this decision when you say that if your are a high income worker that they should use the traditional 401k to take the tax bracket now? Is that based on someone who won't have a house payment or any debt in retirement versus someone who has debt and a mortgage in retirement thereby the high income earner won't need as much income after retirement resulting in lower taxes then in their working years when they have a high salary???
I hope my question came out clear, since my sentence was so long? 
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Nov 09, 2012 8:43 pm |
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oldguy
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quote:
who has debt and a mortgage in retirement thereby the high income earner won't need as much income after retirement resulting in lower taxes then in their working years when they have a high salary???
No. It is based on paying the least amount of taxes. Eg, if you earn $150k now, you get about a 45% tax break (state & fed) on your Trad 401k contribution. And after retirement, when you have no salary, you might be able to sell the 401k a little bit each year and pay only 15% or 20% taxes.
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Fri Nov 09, 2012 10:41 pm |
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clydewolf
Senior Member
Cash: $ 50.25
Posts: 248
Joined: 27 May 2012
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quote:
Originally posted by Publius
If the OP is asking about a ROTH 401K, he cannot max both of these out. The maximum amount total that can be employee contributions is 17,000 in 2012 (17,500 in 2013, I believe).
I have both options at work, my wife has only the traditional 401K option. We put pre-tax money into her traditional and post tax money into my ROTH 401K. I think of this in much the same way as I think of the funds themselves -- We have no way of knowing what the tax rates will be in 30 years, but we can play both sides of the fence by using both types of accounts. We are, in effect, diversifying our tax treatments much the same way that we diversify our investments across multiple sectors.
Publius,
You have a good plan by contributing to both 401ks.
When you are contributing to a ROTH 401k and your employer makes a matching contribution, that matching contribution goes into a Tax Deferred account. Then taking distributions from this 401k each distribution is part tax free and part taxable.
When the ROTH 401k is an option, the employee has the option to split his contribution between a ROTH 401k and a Traditional 401k.
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Sat Nov 10, 2012 1:21 am |
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