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Author: Steiner74 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25240  
Subject: Roth 401k vs Regular 401k Date: 11/5/2006 7:48 PM
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My 401k is making a few changes for 2007. First off, they are increasing the company match from a lousy 50% of the 1st 6% contributed to a slightly less lousy 100% of the 1st 4% contributed. They are also increasing the company match limit by $1000, which is still pretty lousy, but nonetheless, better than what it is now. In addition, they are offering the Roth 401k for 2007.

Now I know it is supposed to be best to contribute whatever percentage the company is going to match up to on the 401k, then contribute the max. limit to a Roth IRA, then any extra money you have back to the 401k. Unfortunately I haven't been too good at contributing to my Roth IRA, since it is so much simpler just to have my payroll deduct the amount from my 401k and I've unfortunately have pretty much neglected the Roth IRA. However, now that the Roth 401k is in the equation, what would be the best way to go about setting money aside, assuming I'm going to foolishly ignore my Roth IRA, but can easily contribute to my Roth 401k. I'm currently 32 and as of now am only contributing the 6% that my company will match. Does it make sense to drop it down to 4% next year on a pre-tax basis since I will still get the company match and perhaps do another 4% to the Roth? Thanks in advance for your help.

- Steiner74
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Author: bph2006 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21177 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/6/2006 5:49 PM
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Employer 401k contributions are just another form of compensation, not some type of gift.

Let's run some numbers. Assume you make $30k per year starting salary, and you get a 5% per year raise (let's not bother with inflation for the moment). If an employer contributed 3% per year and that goes into a stock fund earning 8% per year (historic average), after 20 years you will have about $60,200. Your salary will be about $75,800 (5% yearly raise).
So, after 20 years of service, you get about 10 months of paid retirement, not much of a retirement plan.

Yes, better than nothing, but only a very small fraction of what you will need for retirement.

Not like the good old days, when working for an employer for 20 years would result in a much better retirement.



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Author: Hohum77 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21178 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/6/2006 8:56 PM
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Employer 401k contributions are just another form of compensation, not some type of gift.

Let's run some numbers. Assume you make $30k per year starting salary, and you get a 5% per year raise (let's not bother with inflation for the moment). If an employer contributed 3% per year and that goes into a stock fund earning 8% per year (historic average), after 20 years you will have about $60,200. Your salary will be about $75,800 (5% yearly raise).
So, after 20 years of service, you get about 10 months of paid retirement, not much of a retirement plan.

Yes, better than nothing, but only a very small fraction of what you will need for retirement.

Not like the good old days, when working for an employer for 20 years would result in a much better retirement.


While the employers 401k contributions are a form of compensation they do not count in an individual's income for tax purposes. I could be wrong, but I believe the historic average is 10%. I did a calculation with a fixed $1000 for 25 years at 10%, and end up with about 98K.

Welcome to the Brave New Corporate World...you are now expected to manage your own retirement. The employees covered under defined benefit plans are around 20% and the number continues to fall.


Hohum


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Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21179 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/6/2006 9:02 PM
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You seem clueless on what is going on. Instead of being thankful about a company match, you gripe about it.

------------

I used to work for a company that matched 100% on the first 6%.

Now I work for a company that match 0% on nothing.

Still, I max out the 401k as it's the first line of defense I have to defer income (although I now qualify for the highly compensated employee clause).

MZ4

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Author: CPAScott Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21187 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/8/2006 11:43 AM
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they are increasing the company match from a lousy 50% of the 1st 6% contributed to a slightly less lousy 100% of the 1st 4%

Lousy? Perspective perhaps, but that seems about average for most companies I'm familiar with. What are your expectations? (Who wouldn't love 100% match on as much as you can put in with immediate vesting!)

Anyway ... others have answered the 401(k) v. IRA question -- my vote is whichever one offers better investment choices. Good question though.

CPAScott

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Author: Steiner74 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21192 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/8/2006 11:05 PM
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What are your expectations?

I guess I was more referring to the cap of the company match rather than the actual % of match. But my question is between Roth 401k and regular 401k...not between IRAs. What factors do I need to consider to help determine which is better for me?

- Steiner74

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Author: whyohwhyoh Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21193 of 25240
Subject: Re: Roth 401k vs Regular 401k Date: 11/8/2006 11:12 PM
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Unfortunately I haven't been too good at contributing to my Roth IRA, since it is so much simpler just to have my payroll deduct the amount from my 401k....I'm currently 32 and as of now am only contributing the 6% that my company will match. Does it make sense to drop it down to 4% next year on a pre-tax basis since I will still get the company match and perhaps do another 4% to the Roth?

6% is too low...

I recommend increasing your percentage to at least 10% in your 401k assuming you have good investment options such as a low fee S&P500 index fund or target year retirement (ie 2045 retirement fund).

As for Roth versus non Roth 401K... if you think you are going to be a wealth machine and retire with a large nest egg then put a significant % into the Roth 401K; otherwise, if you think you will retire with a modest nest egg, like 10X your annual income, then I would stick with the non Roth 401K option.

Also if you think taxes will increase dramatically over your lifetime to France like levels, hedge some into the Roth 401K.

--
whyohwhyoh

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