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Xposted on the Foolish 401k board.
http://boards.fool.com/Message.asp?mid=26168764&bid=100160

Hi Guys
I am researching the roth 401k which I can contribute to in 2008. I read about it and understand the tradeoffs between paying taxes now was defering them to later. I am making an assumption that future taxes will be the same as current taxes (I understand this is a big IF). What do you thing about the 4 stages below (think of them as where one is in life)?

1. Young & Low income
- Your tax bracket is low - pay the taxes now;
- Roth 401k
2. Young & High income
- No kids & no house
- Your tax bracket is high - defer the taxes;
- Trad. 401k
3. Middle age & High income
- You have dependents; You own house - interest deductions;
- All the above already lowers your tax bracket;
- Once the kids leave and you paid off the mortgage, your tax bracket will be high
- Roth 401k
4. Middle/Old age & High income
- No kids & no interest deductions
- Tax bracket is high
- Traditional 401k

Am I on the right track here?
thanks
-h
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3. Middle age & High income
- You have dependents; You own house - interest deductions;
- All the above already lowers your tax bracket;
- Once the kids leave and you paid off the mortgage, your tax bracket will be high
-
Roth 401k



One thing about traditional 401(k) contributions is that they can sometimes significantly reduce a taypayer's AGI to where s/he can take advantage of certain benefits.

Say said taxpayer has a high-ish income and is on a cliff of some sort (e.g. near the cut-off point for various credits, Roth IRA eligibility, Schedule A phase-out), the traditional 401(k) might make more sense.

Can you run the numbers both ways to get an estimate of your theoretical AGIs? Then you can compare them to the IRS limits to see if you're affected in this way.
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Thanks snippee. I agree about checking for the cliffs based on trad. 401k contribution. Does the rest of the thhing make sense as starting point cheatsheet?

-h
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snippee wrote:
Say said taxpayer has a high-ish income and is on a cliff of some sort (e.g. near the cut-off point for various credits, Roth IRA eligibility, Schedule A phase-out), the traditional 401(k) might make more sense.

This may vary by the details of the plan, but my plan allows us to do both Roth and Traditional 401k. So, given your example, I could do 3% pre-tax to get my AGI below the limits then another 2% Roth. Best of both worlds.
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yes - we get to choose any % between Trad. 401(k) and Roth 401(k) as long as the total adds up to 15.5K for 2008. SO I agree that one should do the math - I just started on a cheatsheet so I as trying to see if I am on the right track.

-h
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A more important factor might be employer matching. If your employer does match at 50% or 100%, etc, then not doing a 401k is throwing away free money. I don't how you ever make up for that. Then again, take into account vesting. If you don't think you will be around long enough to vest and get the matching, then matching is irrelevant.

P.
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SO I agree that one should do the math - I just started on a cheatsheet so I as trying to see if I am on the right track.

We're going through a similar process at the moment and one other factor popped up in the office discussions. There might be a Stage 5. If you are covered by a pension, it might be beneficial to switch to a Roth 401K for the last X years on which the pension is based if the pension is based on taxable income. It can also be a time to forego a flex account.

rad
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Be careful.

I you are in the 25% tax bracket, there is little chance that a Roth 401K works better from a tax basis than a traditional 401K unless you plan to have a much higher income in retirement.

The trick is that you have to remember that your contributions save you money at your current marginal rate, while your withdrawls will be taxed at your effective rate in retirement.

See the following thread for details:

http://boards.fool.com/Message.asp?mid=25060953&bid=116370&sort=whole

Bruce
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The trick is that you have to remember that your contributions save you money at your current marginal rate, while your withdrawls will be taxed at your effective rate in retirement.

Funny, I got blasted for saying essentially the same thing in this thread: http://boards.fool.com/Message.asp?mid=26263998&bid=100154&sort=whole#26298724

I posted a table of Roth vs. Traditional that is pretty telling in the tax advantages of a Traditional.

-murray
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