pre tax or after tax contributions?

[cleancredit2004]

Ok, currently dh and I invest 6% of our pretax dollars into a 401k plan. We have considered raising our contribution however, I think after tax contributions might be the way to go.

 

Right now I'm ok with the 6% pre tax because the employer matches 66% on every dollar. So I figure an automatic return as well as the end of year statement which indicated a 13.4% return. I didn't think that was too bad.

 

Here's where I need input, If retirement is usually based on the last few years of income and we have another 25 or so yrs left to work, I certainly don't plan to be in a lower tax bracket at that time. Right now, we get deductions for interest, credits for kids, etc. In 25 yrs we won't have any of that.

 

So, why would I want to invest pretax only to withdraw that money plus earnings in 25+ yrs and pay taxes on all of that without any of things I have now to help offset my tax?

 

Wouldn't it make more sense to leave my 401k alone (taking the company match) and invest anything else in a RothIRA? Because of income limitations we probably only have another 5 years to utilize the Roth?

 

Any thoughts?

~Heather

[texastech97]

You have asked a difficult question. First, I would definitely keep contributing to the 401k up to the matching of the company. As for the rest I found a website with some good rules of thumb. Either way you guys are doing good towards your retirement by saving more.

 

http://www.fairmark.com/rothira/thumb.htm

 

Roth IRA vs. Deductible IRA

The choice between saving in a Roth IRA and a deductible contribution to a traditional IRA is more difficult. The traditional IRA gives you a deduction when you contribute, but the Roth IRA gives you a chance to have earnings that are entirely tax-free for decades to come. Here are the main ideas here:

If you're saving the maximum amount each year, the Roth IRA is likely to be better.

If you're in a low tax bracket when saving, the Roth IRA is likely to be better.

Conversely, if you're in a high tax bracket when you contribute and expect to be in a much lower tax bracket when you withdraw your earnings, a traditional IRA may be the better choice.

 

Roth IRA vs. Employer Plan

If your employer provides a 401k or similar plan, you may face a choice between contributing to that plan or a Roth IRA. Don't forget you can do both!

Choose your employer's 401k or similar plan if your employer will make matching contributions, and you don't expect to forfeit the matching contributions by quitting before they're vested.

Otherwise choose as you would for a deductible IRA (see above).

[madflower]

One small addition, to the thought. You want your employer to match everything that gives you a nice 100% return off the bat which TexasTech said. What he didn't mention was anything you wish to contribute OVER that amount towards your retirement, should go into an IRA or another fund.

 

The difference is simply diversification. Your employer may give you limited investment opportunities with your 401k money. With an IRA you have more diverse opportunities and funds to pick from. (Essentially with a Roth you can invest it in whatever the heck you want.) so you can diversify your retirement and cover you butt if your 401k dives or vice versa. IE you can be more aggressive with one fund or the other, etc.

 

So you REALLY want to do both if you want to guarantee you can retire.

 

You also want to manage your investments, and make sure the funds are doing well. At the very least read the quarterly statements. If the funds aren't doing well, change them. It is your money to manage.

[Hwkdrvr]

The idea with a traditional IRA, 401, 403 or 457 is that these dollars are pretax and lower your overall tax now (while you are in a higher tax bracket). You pay taxes on these dollars when you use them during retirement. The thought process is that you will have lower expenses in retirement, requiring less income thereby lowering your tax bracket and lowering the amount of tax you pay on that money.

 

These are general thoughts and may not fit your scenario. You may be better off putting your money somewhere else based on your own requirements. But, you should research this well to ensure that you are receiving the most bang for your buck.

 

About savings outside of your company sponsored plan: you can only contribute up to $4000 (this amount is age/income dependent) this year to a Roth or a Traditional IRA.

 

Buy a couple of books (Personal Finance for Dummies, Investing for Dummies, any of the Suze Orman books, they all offer sound savings advice and help you unravel the mysteries of money) and spend a couple of weeks reading and researching. You will be pleasantly surprised at how empowered you feel armed with the knowledge of how to take care of your money.

 

Research is the key!!

 

HTH

 

Michael

Edited March 8, 2005 by Hwkdrvr

[rpatty]

It's also considered conventional wisdom that at retirement most people only need 60% - 80% of the income that they had while working. While this may not be true for you, you might consider the possibility. If you'll be making more in the future, but then you retire on 70% of that amount, does that still put you in a higher tax bracket than where you are now? If so, Roth is probably the way to go, after the employer match. For most of us, the reality is a guessing game, and the odds are good that it'll come out pretty close to a wash.

[dacar]

I was watching Suze Orman the other night (not sure how people on this board feel about her advice, I haven't been around here long). Anyway, her advice is to fund your 401K only up to the percentage matched by your employer. After that, you're better off putting the funds into a Roth IRA. Better to be taxed on the money now at a lower tax bracket than when you retire at a (hopefully) higher bracket. After you've maxed the Roth each year, then do mutual funds. I believe she said that she DOESN"T recommend paying down your mortgage since interest rates are so low and you can deduct the interest. She also believes you shouldn't start saving for children college funds until your retirement is funded.

 

Hope this helps.

[cleancredit2004]

I was watching Suze Orman the other night (not sure how people on this board feel about her advice, I haven't been around here long).  Anyway, her advice is to fund your 401K only up to the percentage matched by your employer.  After that, you're better off putting the funds into a Roth IRA.  Better to be taxed on the money now at a lower tax bracket than when you retire at a (hopefully) higher bracket.  After you've maxed the Roth each year, then do mutual funds.  I believe she said that she DOESN"T recommend paying down your mortgage since interest rates are so low and you can deduct the interest.  She also believes you shouldn't start saving for children college funds until your retirement is funded.

 

Hope this helps.

<{POST_SNAPBACK}>

 

 

Yeah, that was kind of my thought. I hope that I'm not working my butt off for the next 30 yrs so that I can retire with less money then I currently make now. I don't know of anyone who wants to be poorer when they retire, I thought the goal was to be better off.