Benefits of Roth 401k?

[Atty]

For a while now I've noticed on my works login page for all of our information (paycheck, benefits, etc) we have a Roth 401k plan now. I've researched into it a bit but I'm wondering if its a good idea to start investing in one?

Its basically just a company matched 401k that is taxed before its invested, so you can take it out whenever you want and get money? So a better way to save money? I must be missing something on this whole thing because otherwise it screams free money.

E: I'm 22 and already invest in my bog standard 401k.

 

[purbeast0]

roth is when you get taxed up front, traditional you put money in pre-tax but are taxed when you take it out in the future.

best way to be safe is to have both kinds.

 

[DCal430]

In a Roth 401K the employer contribution is in a separate account and subject to tax and penalties when withdrawn. Only your contribution is post tax and not subject to tax and penalties when withdrawn.

 

[Doppel]

Always invest in whatever is necessary to maximize any employer contributions. Always, always, always.

 

[HardcoreRobot]

tax free growth. imo its better than traditional 401k for young people, lots of time for that to grow. you likely have a low salary now, which means the tax hit now isnt as bad as well.

when you retire, you can pad your income with those distributions and not increase your tax footprint.

your company match will go in as traditional, you will end up with some of each.

 

[fstime]

roth is when you get taxed up front, traditional you put money in pre-tax but are taxed when you take it out in the future.

best way to be safe is to have both kinds.

This, if you wan't both types of accounts, keep your 401k for pre-taxed savings and open up a Roth for tax free withdrawals.

One disadvantage of a Roth IRA is contributions are NOT tax deductible.

ex. You made $50,000 last year and contributed $5,000 to your 401k (or Traditional IRA), your W4 will only show you made $45,000 for tax related purposes.

The wiki is full of the information you are looking for: http://en.wikipedia.org/wiki/Roth_IRA I t really depends on the person, for example:

"A taxpayer who chooses to make a Roth IRA contribution (instead of a traditional IRA contribution or tax deductible retirement account contribution) while in a moderate or high tax bracket will likely pay more income taxes on the earnings used to make the Roth IRA contribution as compared to the income taxes that would have been due to be paid on the funds that would have been later withdrawn from the traditional IRA, had the taxpayer made a traditional IRA contribution."

 

[HybridSquirrel]

This, if you wan't both types of accounts, keep your 401k for pre-taxed savings and open up a Roth for tax free withdrawals.

One disadvantage of a Roth IRA is contributions are NOT tax deductible.

ex. You made $50,000 last year and contributed $5,000 to your 401k (or Traditional IRA), your W4 will only show you made $45,000 for tax related purposes.

The wiki is full of the information you are looking for: http://en.wikipedia.org/wiki/Roth_IRA I t really depends on the person, for example:

"A taxpayer who chooses to make a Roth IRA contribution (instead of a traditional IRA contribution or tax deductible retirement account contribution) while in a moderate or high tax bracket will likely pay more income taxes on the earnings used to make the Roth IRA contribution as compared to the income taxes that would have been due to be paid on the funds that would have been later withdrawn from the traditional IRA, had the taxpayer made a traditional IRA contribution."

Roth IRA =/= Roth 401k

 

[DaveSimmons]

You're losing the tax deduction now that you would get with a traditional 401k. So if you put $5000 into it, you will pay $1,000 more in taxes this year if the tax bracket for your last bit of income is 20%.

But: at retirement, you pay no taxes on any of the money you take out of the Roth, all of the growth is tax-free.

I look at it this way: if you can afford to pay the extra taxes on the Roth now, you get to lock away more tax-free retirement savings.

If you can't afford to max out the Roth 401k, you might be better off maxing out a traditional 401k instead.

 

[DesiPower]

If you max out your traditional IRA and still want to invest more into IRA then you do ROTH. IMHO, dumping into ROTH is not worth it until you max out your traditional.

 

[overst33r]

If you max out your traditional IRA and still want to invest more into IRA then you do ROTH. IMHO, dumping into ROTH is not worth it until you max out your traditional.

A traditional IRA doesn't make sense for most people. A Roth does.

Unless you make over a certain amount of money, your marginal tax bracket in the future will likely be higher than it is now, therefore a Roth makes more sense.

Also, annual contribution limit is $5k for this year, you can only invest that amount of money overall, not each as your post implies, though you can have one of each account.

 

[DesiPower]

Also, annual contribution limit is $5k for this year, you can only invest that amount of money overall, not each as your post implies.

You mean ROTH has limit too?

 

[overst33r]

You mean ROTH has limit too?

Absolutely. $5000 if you're single and under 50.

 

[boomhower]

I switched mine from traditional to Roth contribution. The way I looked at it is that even when I retire my income should be higher than what it is now so the taxes are cheaper to pay now. But what the tax situation will be like in 30 years in anyones guess.

 

[NoCreativity]

roth is when you get taxed up front, traditional you put money in pre-tax but are taxed when you take it out in the future.

best way to be safe is to have both kinds.

I think this is the best approach.

Although Roth is supposed to be tax free upon distribution, my bet is that the government will find a way to tax that money.