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Author: HobbyDave Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75665  
Subject: Quick Roth 401k question Date: 7/10/2006 12:08 PM
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I would just like to verify something quickly.

A normal 401k allows a person to put away 14k per year (currently). When you take that money out, you will pay taxes, so you end up with perhaps 10k (give or take).

A Roth 401k allows a person to put away 14k per year after taxes. When you take that money out, you end up with 14k.

So if you're simply looking for the largest amount you can put away automatically (the whole "pay yourself first" thing), the Roth 401k would be much better than the normal 401k correct? This is ignoring the fact that your salary would go down by 14k with the normal 401k option, while closer to 18k with the Roth 401k?
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Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52579 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 12:12 PM
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HobbyDave:

I'm probably not the best to reply to this, having retired before all the Roth excitement, and before they started allowing such huge sums to go into even a 401k! (We were limited to much smaller amounts a few years back.)

However, from a tax standpoint, much depends on WHEN you take money out, the circumstances, and your age. In our case, we did nothing with Roth because it made no sense to have to leave whatever we put in there for 5 years, nor to pay taxes on IRA money to "convert" it, since were already retired and happier with a normal IRA (converted from my former 401k).

Not an answer, maybe, but I hope it can help a little.

Good luck.

Vermonter

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52581 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 12:22 PM
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A normal 401k allows a person to put away 14k per year (currently).

$15K as of 2006. But other than that, your first level analysis is correct.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52584 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 1:09 PM
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Strictly from the point of view of making the largest after-tax contribution, your analysis is correct.

But if you're in the 25% bracket now and you think you'll be in the 15% bracket at retirement (using current brackets as an example), that seems like insufficient justification for choosing a Roth. In that case, I think a traditional (deductible) IRA plus another $3-4K in a taxable account might be a better bet, given the favored treatment of long-term capital gains and dividends.

#29

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Author: 110intheshade Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52586 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 1:55 PM
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Interested to hear who here thinks say 10-20 years down the road those Roth Rules will have been ahhheemm "Ammended"?
I do

110

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52587 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 3:49 PM
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>> Interested to hear who here thinks say 10-20 years down the road those Roth Rules will have been ahhheemm "Ammended"? <<

My gut feeling is that the Roth contributions may be terminated in the future, but existing contributions will be grandfathered. I don't think even a revenue-starved Congress would renege on the deal for already existing contributions.

A bigger threat to the Roth would be a move toward a national sales tax instead of just an income tax.

#29

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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52588 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 3:57 PM
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"Interested to hear who here thinks say 10-20 years down the road those Roth Rules will have been ahhheemm "Ammended"?"

The government is going to be forced to do some fancy-footwork in
the future. They could easily put a feature into the tax code that
if a person has a Roth, then they will forfeit some of their
Social Security, or something like that. I'm expecting them to renege
on some/many of the current entitlements. Time will tell.


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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52590 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 4:38 PM
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Interested to hear who here thinks say 10-20 years down the road those Roth Rules will have been ahhheemm "Ammended"?

Count me as one who believes there is a good chance they will be amended sometime in the next 20 or 30 years. And not necessarily for the better.

--Peter

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52595 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 8:46 PM
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A normal 401k allows a person to put away 14k per year (currently). When you take that money out, you will pay taxes, so you end up with perhaps 10k (give or take). This means that you would pay more current taxes with the Roth than you would with the normal 401k.

A Roth 401k allows a person to put away 14k per year after taxes. When you take that money out, you end up with 14k.


Yes, you are correct, but, don't forget that you need to earn something greater than 14k before taxes (18K or so) to be able to put the 14K into the Roth 401k.
In both cases you would hope that there will be more than 14K to take out at retirement time.
If tax rates are the same currently as they will be when you take money out the two should be equivalent. And of course, this assumes no changes to the tax treatment of tax advantaged withdrawals in the future.

Bob


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Author: FoolishGerald One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52596 of 75665
Subject: Re: Quick Roth 401k question Date: 7/10/2006 8:49 PM
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My feeling is that the conversation is fruitless altogether. The Roth is here now, so enjoy it while you can. Yes, you need to try to plan for the future and the things it holds for certain for you (inflation, rising health costs as you grow older, etc). While you should be building in a safety net for the unexpected, spending a lot of time worrying about what Congress MIGHT do sometime in the far distant future is not going to get you anywhere.

And for the record, a national sales tax would be bad for EVERY retirement plan, not just the ROTH. The so-called fair tax is the worst idea ever, but that is another topic for another time.

I don't think the Roth is going anywhere, and here is why.

Congress likes to legislatively-engineer the American public in a lot of different ways. For example, lets say that a large part of the population is not paying their students loans. How can Congress make us all happy debt-payers? Let's allow people to have an adjustment for student loan interest for the first five years they pay it, and to make it sweeter, we'll let them do it without a Schedule A. Hey! That works, people are paying their student loans off. Maybe we should let them write off the interest until they pay the loan off!

Hmm, there is very little saving going on for the average American. All of this consumerism is great, but now we are going to have to support millions of seniors with no savings. And the younger taxpayers aren't saving anything! Let's change the current system so they have an option that gives them tax free money for retirement. Then we'll give them a credit for putting money away in a qualified retirement plan and see what happens. Hey! That works too, so now lets have them put even more money into this new plan.

The point is, things come and go in the income tax world all of the time. In six months the new energy credit will be all the rage, and this is an effort to get our houses and cars more energy efficient. The new big fad problem will yield the next credit or adjustment as well.


I call this the "don't worry, pay taxes" plan.



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