Thoughts (need research and rewrites for it to makes sense ): One of the popular questions about 401k has been: “Am I better off using my maximum 401 (k) contribution by (1) putting USD 18,000.00 into a Roth 401 (k) or (2) putting USD 18,000.00 into a Traditional 401 (k) and investing the portion that would have been paid in taxes had I done the Roth?” I would like to begin a series of blogs on Roth vs. Traditional with an analysis that addresses the question above. To do this, we need to compare (Strategy 1) a Roth 401 (k) account to (Strategy 2) a combination of a Traditional 401 (k) account (up to the USD 18,000.00 contribution limit) and a taxable account (for the excess that would have been paid in taxes had you done the Roth). To find the excess amount, we need to find how much pre-tax money it takes to create USD 18,000.00 of post-tax money. The math is as follows: USD 18,000.00 / (1 – 0.40 (assumed tax rate)) = USD 30,000.000. The excess is therefore USD 12,000.00 (USD 30,000.00 – USD 18,000.00). Based on our analysis below, if your taxes stay the same or go up in the future, a Roth 401 (k) is the better option today. In our example, you will end with USD 595,187.17 compared to USD 576,372.20. Favoring a mix: • Hedge against government unknowns. • Help to balance your future tax liabilities. If the funds are split between both structures as opposed to invested entirely in Traditional, your RMDs may be less and therefore potentially place you into a lower tax bracket. • If all of your funds are invested in Roth, then you will most likely have no RMDs and will retire in a very low income tax bracket. In that case, it would be beneficial to have some funds in a Traditional structure so that you can take advantage of that low tax rate.
#401k #Guide
