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Asked 11/13/2007

Traditionarl 401k or Roth 401(k)?

I'm 23, just finished college and started working. My employer offers a 401k or a Roth 401 (k) plan and I don't know which way to go. I'm thinking about going with the Roth, because I plan on making a lot more money by retirement, and that is at least 30 years from now.

What would be the best way to go?

I plan on contributing 4% of my wages with the company matching half of that.

Thanks!

 
 
 
 
 
 
Answers

Answer 1/5 - Submitted 11/13/2007

With the 401k you have to pay taxes on the money when you withdraw it and you can put the money into the 401 without paying the taxes now.
With the Roth you have to pay taxes on the money you contribute to the Roth but you do not have to pay taxes when you withdraw the money.

 
 

Answer 2/5 - Submitted 11/13/2007

The "roth" has a limit $4,000 unless over 50 then $5,000 annually.

 
 

Answer 3/5 - Submitted 11/13/2007

You're young, in a relatively low tax bracket, and don't yet need the tax deduction that the pre-tax offers. I'd seriously think about the ROTH. If the company will match your ROTH 401k deductions then great!!! If not, max the match in the 401k portion then put the rest in the ROTH portion.

And ignore that poster who gave you ROTH IRA rules. It's a Roth 401k. Your limits are the $15k+ for the ROTH and the traditional 401k added together.

 
 

Answer 4/5 - Submitted 11/13/2007

Go with the ROTH 401 !! You learn to live with the amount you take home...and the amount you pay in taxes... but there is no greater gift from this government than TAX-FREE income at the end of the line... Try to realize the potential gains you see in front of you...and under a ROTH it's YOURS.
Also...is that the max your employer will match? Whatever it is, get to the max...it's like getting a raise if you think about it.... same as before, you learn to live with what you take home...( and that will change when you get raises along the way) but whatever you ( and your employer) are socking away will be growing and growing.
When you are picking your funds from the plan, don't be afraid to go a little aggressive these first few years... and go global, too.
Good luck!

 
 

Answer 5/5 - Submitted 11/16/2007

On the one hand, by adding pre-tax dollars to your 401(k) it will save you taxes today but you will be taxed on the amount you take out upon retirement including any appreciation. On the other hand if you contribute into a Roth 401(k), then you will taxed on your income today and upon distribution at retirement it will be tax-free to you. What you need to consider is whether or not you think you will be in a higher or lower tax bracket at the time of retirement. if you believe that you will be in a higher tax bracket during retirement than you should contribute Roth 401(k). On the other hand if you need to save on taxes today you should contribute pre-tax dollars into into a 401(k). Most certified financial planners will suggest contributing into a Roth 401(k), if you are not in a high income tax bracket today. It should be noted that you should never contribute less than your company match because you would be throwing away free money. Also, if you think you want to combat the chance of being in high income tax bracket today, (in addition to your Roth 401(k) you should consider contribution into a traditional IRA. In a traditional IRA, you would contribute your money and receive a deduction on your tax return. Upon retiring you would be taxed on any distributions (principal and any appreciation).

 
 
 
 

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