roth vs. traditional 401k

Download Roth vs. traditional 401k

Post on 24-Jan-2015

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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.

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  • 1. Making The Most of Your Retirement Plan The Roth 401k vs. The Traditional 401k

2. The Roth 401k The Traditional 401k Contributions go in AFTER tax Contributions go in BEFORE tax Withdrawals (@59.5) are taxed @ ordinary tax rate Withdrawals (@59.5) come out tax free 3. Roth vs. Traditional 401k Example 1 Assumptions Income: Pre-retire tax rate: Post-retire tax rate: Contribution: $60,000 25% 20% 10% (of pre-tax income for traditional&ofpost-taxincomefor Roth) 4. Assumptions: Income: $60,000 Pre-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 Working Years 5. Assumptions: Income: $60,000 Pre-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 Working Years Taxes are LESS in the traditional because they are calculated on the amount minus the contribution 6. 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 7. Time To Cash out... Which account has more? 8. Assumptions: Income: $60,000 Pre-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 9. So, it looks like the traditional was better there. Right? Yeah. But the tax rates were higher for the pre-retire stage. Let's switch that up to see if anything changes. 10. Roth vs. Traditional 401k Example 2 Assumptions Income: Pre-retire tax rate: Post-retire tax rate: Contribution: $60,000 20% 25% 10% (of pre-tax income for traditional&ofpost-taxincomefor Roth Pre-retire tax rate is now lower than the post-retire tax rate 11. Assumptions: Income: $60,000 Pre-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 Working Years 12. Assumptions: Income: $60,000 Pre-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 Working Years Contribution is GREATER due to taxes being LESS in this example 13. 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 14. Time To Cash out... Which account has more? 15. Assumptions: Income: $60,000 Pre-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 16. Now the Roth has a higher amount... What's the takeaway? 17. The WHY Ordinary tax rate today Ordinary tax rate when you withdraw funds If tax rates are expected to be higher when funds are withdrawn then tax rates are for you today... the traditional 401k would be a better option 18. The WHY Ordinary tax rate today Ordinary tax rate when you withdraw funds If tax rates are expected to be higher today compared to tax rates when you plan to withdraw funds... the Roth 401k would be a better option 19. What are you waiting on?! Get started saving!!