Roth vs. traditional 401k

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!!