Reply to Roth 401K or Regular 401K

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]It is a bit of an oversimplification, but a general test is whether you expect to pay a higher marginal tax rate (1) NOW or (2) LATER, when you take distributions (i.e., in retirement).  If you expect your marginal rate will be higher in retirement, you should do the ROTH option, because that allows you to pay taxes now and then never pay any additional taxes on contributions OR earnings.  If you expect that your marginal rate will be lower in retirement, you should do the TRAD (i.e., non-Roth) option, so that you can DEFER all taxes until you have that lower rate.

Of course, nobody has a crystal ball, so we can't predict with 100% certainty whether your tax rate will be higher or lower 30-40 years in the future.  However, at $70k income, making a few reasonable assumptions, I think it's probably more likely that your tax rate will be higher in the future.  So, like the other posters, I'd suggest you put your money in the ROTH option, so that you will never pay taxes again on those contributions OR earnings.

If you want to hedge your bets, you can always just do 50/50.[/quote]

I don't understand the tax rate assumption.  If you are retired, shouldn't you be in a lower tax bracket than when you were working? What am I missing?[/quote]

Normally. Except the kid is just starting out, so he's presumably in a lower tax bracket now than he will be mid-career, which it will probably make more sense to go with a traditional 401k, where you exclude contributions from current income but pay tax later.[/quote]

It doesn't matter whether he is in a lower tax bracket now than later in his career.  What matters is whether he is in a lower tax bracket now than he will be in retirement.  Now if you assume that someone starting at $70k will have their income continually go up and will save large sums to the point where he will be in a higher tax bracket as as result of withdrawals from his retirement accounts, then sure it makes sense to go Roth now.

However, lots of things can happen between now and then-- maybe OP's salary won't be a continual increase, or maybe OP isn't able to save as much as planned, or  maybe due to offshoring or technology ends up having to retire earlier than planned.  I am assuming if OP is using a Roth then he/she is saving less than with a traditional 401k, esp. in a 25% tax bracket (plus state taxes around here are north of 5%).

So really it comes down to, if OP uses a traditional 401k, the downside risk is having to pay a little extra tax if he/she is very successful.  If OP uses a Roth the downside risk is not having enough money to live  on in retirement, if things don't go as planned.  Personally, I would rather take the first risk, but maybe that's why I am not an entrepreneur.[/quote]

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