So I know all the differences between a Roth 401k and a Traditional 401k... A calculator can be found here: http://www.smartmoney.com/retirement/401k/index.cfm?story=roth-ira-calculator I *think* it's clear that IF you could max out your 401k contribution ($15,500 per year), the Roth 401k is the way to go if you're still relatively young. --Note: I have heard something about the fact that you might want to split it in order to not have such a large non-taxable income in the future, but I don't know much about that. Anyway, I am young...but I'm not in a position where I can max out my contribution. In fact, I'm in a position where I would have to decrease my contribution to switch to a Roth 401k (because I need the same take-home paycheck right now, regardless of the option I choose). Question The calculator on the link above tells me that even if I decrease my contribution %age in order to keep the same paycheck, the Roth 401k is *still* smarter in the long-run (as long as my tax bracket increases even just a little bit, which seems to be the general consensus around...let me know if that's an incorrect assumption for a young, single person with no deductions right now). But is that calculator taking into account the fact that with a Roth 401k, you will have more income that will be taxed? i.e. if you make 50,000, under a traditional 401k you'd be taxed on (50k - contribution to 401k), whereas the roth 401k you'd be taxed on the full 50k. I'm obviously overthinking this to hell.. so I'm completely lost now in what to do.
You're overthinking this. Basically, you can get taxed on the seed, or the weed. ie. with a Roth you're only taxed on what you deposit, and not the growth, although you get taxed every year. With a Traditional, taxes are postponed until you withdraw, but you are taxed on both the deposits and its earnings.
ok I guess the problem is that there are 2 things we're talking about getting taxed on.. Forget the 401k money in terms of taxes--I understand when and how that's taxed, and I think the calculator takes it into account. I'm talking about my annual income. I'll be taxed a lot more if I take the Roth 401k option because my entire income will be taxable, whereas under the Traditional 401k option, your contribution to the 401k is not part of your taxable income.
Roth > Traditional (when young). Put whatever your company matches in Traditional. Max out your Roth ($4,000). Put any remaining amount you want to save in Traditional.
The Roth 401k is most likely the best way to go for you. You say you're young, and you will more than likely be in a higher tax bracket when you retire (especially given that you're so retirement conscious already). There really isn't much to think about here. Your combined contribution limit to ANY 401k plan is $15,500 (Roth or Traditional), so basically the only question you ask is "Would I rather get taxed on my money now, or later?" Now is probably your answer given your age. And yes, the calculator is definitely taking into account that you will have more income taxed NOW, because that is the main difference between these two accounts.
Regular 401k Set aside $15k to contribute (pre-tax) Earn an annual return of 10% Get taxed when you pull it out in 40 years $15*(1+.10)^40*(1-t) Roth 401k Set aside $15k to contribute (pre-tax) Get taxed on it now Earn an annual return of 10% Pull it out tax free in 40 years $15*(1-t)*(1+.10)^40 Which is better? It all depends on whether t is higher today or in 40 years. Which depends on your tax bracket and what the government will do in the future
MrWhite, thanks for answering that main question.. that the calculator was already taking it into account. If being retirement conscious now will make my tax bracket higher later, then you're right, it'll definitely be higher later.. so it sounds like Roth is the way to go. Appreciate it! TL--as I stated in the convoluted original post, I already think that the Roth is the way to go if you can max out your contribution at 15.5k...the problem is that I can't quite do that at this point.
My point was that it's actually the same thing. Unless you think you'll be in a higher tax bracket during retirement (which may be the case)
I have a traditional 401k (corporate) and Roth IRA, and both are getting pounded right now Good thing I'm not touching that money for 40 years
