roth vs. traditional 401k
DESCRIPTION
In this slideshare we talk about the differences between the traditional 401k and the Roth 401k. We give examples of both of them and discuss when each makes sense.TRANSCRIPT
Making TheMost of Your
Retirement PlanThe Roth 401k
vs. The Traditional 401k
The Roth401k
TheTraditional
401k
Contributionsgo in AFTER tax
Contributions goin BEFORE tax
Withdrawals (@59.5)are taxed @ ordinary
tax rate
Withdrawals (@59.5)come out tax free
Roth vs. Traditional 401kExample 1
Assumptions
Income:
Pre-retire tax rate:
Post-retire tax rate:
Contribution:
$60,000
25%
20%
10% (of pre-tax income fortraditional & of post-tax income forRoth)
Assumptions:Income: $60,000Pre-retire tax rate: 25%Post-retire tax rate: 20%Contribution: 10%*
Roth
Traditional
Income:Taxes:
Net Pay:CONTRIBUTION:
$60,000 $15,000 ($60,000 * 25%)
$45,000$4,500 ($45,000 * 10%)
Income:CONTRIBUTION:
Taxable Income:Taxes:
Net Pay:
$60,000 $6,000 ($60,000 * 10%)$54,000$13,500 ($54,000 * 25%)
$40,500
WorkingYears
Assumptions:Income: $60,000Pre-retire tax rate: 25%Post-retire tax rate: 20%Contribution: 10%*
Roth
Traditional
Income:Taxes:
Net Pay:CONTRIBUTION:
$60,000 $15,000 ($60,000 * 25%)
$45,000$4,500 ($45,000 * 10%)
Income:CONTRIBUTION:
Taxable Income:Taxes:
Net Pay:
$60,000 $6,000 ($60,000 * 10%)$54,000$13,500 ($54,000 * 25%)
$40,500
WorkingYears
Taxes are LESS in thetraditional becausethey are calculated onthe amount minus thecontribution
Assumptions:Growth Rate: 6%Years till Retirement: 30
Growth of Monies(in 30 years)
Roth Traditional
Contributed:$4,500
Contributed:$6,000
Grew to: $27,846
Grew to: $34,461
Time ToCashout...
Whichaccount
hasmore?
Assumptions:Income: $60,000Pre-retire tax rate: 25%Post-retire tax rate: 20%Contribution: 10%*
Roth
Growth of Monies
Taxes
Net Withdrawal
Traditional
$25,846 $34,461
$6,892
$27,569
$0
$25,846
So, it looks like thetraditional wasbetter there. Right?
Yeah. But the tax rateswere higher for thepre-retire stage. Let'sswitch that up to see ifanything changes.
Roth vs. Traditional 401kExample 2
Assumptions
Income:
Pre-retire tax rate:
Post-retire tax rate:
Contribution:
$60,000
20%
25%
10% (of pre-tax income fortraditional & of post-tax income forRoth
Pre-retire tax rate isnow lower than thepost-retire tax rate
Assumptions:Income: $60,000Pre-retire tax rate: 20%Post-retire tax rate: 25%Contribution: 10%*
Roth
Traditional
Income:Taxes:
Net Pay:CONTRIBUTION:
$60,000 $12,000 ($60,000 * 20%)
$48,000$4,800 ($45,000 * 10%)
Income:CONTRIBUTION:
Taxable Income:Taxes:
Net Pay:
$60,000 $6,000 ($60,000 * 10%)$54,000$10,800 ($54,000 * 20%)
$43,200
WorkingYears
Assumptions:Income: $60,000Pre-retire tax rate: 20%Post-retire tax rate: 25%Contribution: 10%*
Roth
Traditional
Income:Taxes:
Net Pay:CONTRIBUTION:
$60,000 $12,000 ($60,000 * 20%)
$48,000$4,800 ($45,000 * 10%)
Income:CONTRIBUTION:
Taxable Income:Taxes:
Net Pay:
$60,000 $6,000 ($60,000 * 10%)$54,000$10,800 ($54,000 * 20%)
$43,200
WorkingYears
Contribution isGREATER due to taxesbeing LESS in thisexample
Assumptions:Growth Rate: 6%Years till Retirement: 30
Growth of Monies(in 30 years)
Roth Traditional
Contributed:$4,800
Contributed:$6,000
Grew to: $27,569
Grew to: $34,461
Time ToCashout...
Whichaccount
hasmore?
Assumptions:Income: $60,000Pre-retire tax rate: 20%Post-retire tax rate: 25%Contribution: 10%*
Roth
Growth of Monies
Taxes
Net Withdrawal
Traditional
$27,569 $34,461
$8,615
$25,846
$0
$27,569
Now the Roth has ahigher amount...
What's the takeaway?
The WHY
Ordinary tax rate today
Ordinary tax rate when youwithdraw funds
If tax rates areexpected to be
higher when fundsare withdrawn then
tax rates are foryou today... thetraditional 401k
would be a betteroption
The WHY
Ordinary tax rate today
Ordinary tax rate when youwithdraw funds
If tax rates areexpected to be higher
today compared totax rates when you
plan to withdrawfunds... the Roth 401k
would be a betteroption
What are youwaiting on?!
Get startedsaving!!