Greetings FWers.

My company has recently started offering the new Roth 401(k) account in my retirement plan. I'm 26 and I've been deferring 6% to my 401(k) since I started working here (almost 4 years ago). I'm wondering if the Roth 401(k) is a better deal in the long run. The matching is 50% of the first 6% (of the two combined accounts). So my question is, after the first 6% is matched in the traditional 401(k), should additional deferrals be made there or is the Roth the way to go when there's no more company matching? I've heard many polar opinions from several co-workers.

I can't do the exact math, because I'm not sure what my income bracket will be when I retire, nor how much the tax rate will be at that point. Anyone have strong opinions here?

I chose to stay with a traditional 401k. My husband and I saved over $4,000 in taxes by contributing to our 401k's last year. I haven't done the math, but I feel that the 35 years of compound interest on the additional $4,000 savings would negate any taxes due when I pull the money out.

kerstbrood said:if they match roth401K go for it! being after tax dollars and all, you're getting more money.

How do you figure? 6% of my net income is less than 6% of my gross income, so wouldn't the company match on the traditional be a higher amount?

kerstbrood said: if they match roth401K go for it! being after tax dollars and all, you're getting more money.

That's incorrect. The company does not put the match into the Roth 401k. Instead, they'll deposit the match into a tax-deferred 401k (separate account). This is required by IRS. You do NOT get more money on the match by choosing a Roth.

My company has the same thing, 401(k) offered on a pretax or Roth basis. I've decided to hedge my bets and contribute to both: 3% pretax and 6% Roth. Company will start contributing another 3% come July, I'm believe that counts as pretax contributions, taxed on withdrawal.

One thing I haven't been able to figure out, though, what happens when I quit and decide to roll all this over into my IRA? I currently have a traditional IRA but make too much to contribute to a Roth IRA, so I don't have one. Can I open a rollover Roth IRA to hold the Roth contributions & earnings from my 401(k) and roll the rest into my existing traditional IRA? Is there such a thing?

dawndelion said:I chose to stay with a traditional 401k. My husband and I saved over $4,000 in taxes by contributing to our 401k's last year. I haven't done the math, but I feel that the 35 years of compound interest on the additional $4,000 savings would negate any taxes due when I pull the money out.There are a number of differences between traditional and roth accounts, but from a purely mathematical standpoint, a traditional account is more advantageous if you are in a higher tax bracket now than the bracket you anticipate entering upon your retirement. If the opposite is true, the roth is more advantageous. If you expect your tax brackets to remain the same, the roth and the traditional accounts will be exactly the same. You should of course keep in mind that you can make a larger effective after-tax contribution to a roth than you can to a Traditional account if you initially choose to allocate a larger amount towards your roth than the amount that would be required to be allocated towards a Traditional account.

To say it in a different way, it makes absolutely no difference whether you pay tax on your contributions up front and then let the interest accrue on that after-tax amount or whether you do not initially tax contributions but then tax everything at the time you withdraw the money. The ONLY thing that matters in this case is whether the tax bracket is lower at the time you contribute the money vs. when you withdraw it.

thok said:One thing I haven't been able to figure out, though, what happens when I quit and decide to roll all this over into my IRA?Traditional 401(k) plans are rolled over into a traditional IRA, and a Roth 401(k) rolls over into a Roth IRA, even if you are above the income limit for Roth IRA contributions.

geo123 said:kerstbrood said:if they match roth401K go for it! being after tax dollars and all, you're getting more money.Just like the Traditional match, the Roth match is ALWAYS deposited into a traditional account. So, NO, you are NOT getting a greater match if you go with the Roth versus a Traditional account.

I didn't know.
I figured if they match & deposit it in the roth then the company is paying the taxes on the match.

jayK said:thok said:One thing I haven't been able to figure out, though, what happens when I quit and decide to roll all this over into my IRA?Traditional 401(k) plans are rolled over into a traditional IRA, and a Roth 401(k) rolls over into a Roth IRA, even if you are above the income limit for Roth IRA contributions.That's absolutely correct. A direct rollover is never affected by the income limits, tax brackets (a rollover is not a taxable event), etc...

dmlavigne1 said:jayK said:thok said:One thing I haven't been able to figure out, though, what happens when I quit and decide to roll all this over into my IRA?Traditional 401(k) plans are rolled over into a traditional IRA, and a Roth 401(k) rolls over into a Roth IRA, even if you are above the income limit for Roth IRA contributions.

The limits are eliminated in 2010.

For the billionth time, roth vs traditional is just a tax hedge. Nothing more nothing less.

what about being able to save more pre-tax dollars with a Roth, for those people who can't control their spending and need money to be taken from them ?