Explain benefits of Roth 401k?

[Breand]

There was a post that I can't find, I think Grieve wrote it, about why putting money into a Roth is so beneficial, would you mind rehashing it again?

I look at it at face value and to me, a traditional 401k makes more sense because I won't have the same income level when I retire than I do now, so it'd be cheaper to take money out of a 401k later in life, than pay taxes on Roth investments now. But I know Grieve explained it in a way that made good sense.

[Jakensama]

You can withdraw your principle tax free after a few years in an emergency. It also lets you keep money in there for as long as you want, wheras traditional IRAs make you start withdrawing at 70 or something.

They are generally a good idea for someone in a low tax bracket who thinks they might have some income after retirement from what I understood.

[Snowreap]

it's my understanding that the difference between a traditional 401(k) and a Roth 401(k) is essentially the same as the difference between a traditional IRA and a Roth IRA.

if you think that tax rates will go down as you get older, then a traditional 401(k) is probably better for you, because your contributions go in before being taxed (at your current high rate), but you pay tax on distributions later (when you expect tax rates to be low).

if you think that tax rates will go up as you get older, then a Roth 401(k) is probably better, because your contributions go in after being taxed (at your current low rate), and distributions are not taxed at all (thus evading future high tax rates).

for people in our parents' generation (and before) it has been fair to say that as they age and their income falls, their tax rate gets lowered. but with so many baby boomers now retiring, it is not clear that future generations will be able to assume that their retirement tax rate will be significantly lower, in fact it may go up significantly to pay for expanded social programs, to prevent the government from defaulting on its debt payments, or both.

-ken

[Jakensama]

Oh I didn't see 401K and was thinking IRA. Can you withdraw your principle from a Roth 401K as well?

Yeah, we are going to have to pay for the baby boomer screwing up our country, so I would say its safer to say income tax rates are going up at some point before retirement.

[Vanraw]

This was the link.

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In addition to the info below, I recently found more info with my dad passing. My parents, like yours had dads pension, and social security, and then some nice savings and IRA.

When my dad passed my mom lost his pension. So my moms ss benefits went up but she lost his pension revenue. So I have her drawing from her Ira first, to cover the lost income. BUT!!!! You have to be carefull. The more you draw as income, you have to start paying taxes on social security. Over 25k you pay taxes on 50% of ss. This can go all the way up to 80% today, and is bound to change as congress makes changes.

So this us another benefit to having cash, savings Roth that are not tax qualified. Bottom line, is when you retire you want to haventhe lowest tax burden possible.

Jake, Not exactly. On the ROTH you can take out the principle you invested after 5 years, but you cant touch the profit until 59 without paying penalty and tax. The only exception is first time home buyers that can take out 10k one time from profit.

Breandon, It really depends on where your at and what your tax burden will be, come retirement. My take is that I have a mix. I have a lot in standard 401k, and I will have to pay taxes on that. The taxes will be based on how much I pull out of 401k, and how much I am making on taxed investments and benefits. My plan is to balance how much I take from 401k along with other income, and keep my tax bracket lower by augmenting my income with Roth withdrawals.

My hope is to hold down my tax bracket to a minimum. Take out 401k differed up to the bracket level and live the rest off 401k roth and cash investments. Note that I don't have a regular IRA. My company and many companies offer ROTH IRA, which is not subject tot he income restrictions of a IRA. The ROTH 401k follows the 401k rules / maxes, not the smaller IRA limits.

Rule of thumb.

1. Always do the 401k match. always. Anyone who doesn't is throwing money on the floor.
2. Try Increase 401k deferred as well as tax deductions to pull you down to the next tax bracket or prevent you from hitting the highest.
3. Invest ROTH if you can so you have tax free cash to draw from, and be in a emergency position to draw the principle before 59.