401k Plan Contributions

Discussion in 'Finance, Investing & Economy' started by musicmaker, Sep 24, 2006.

  1. peledre

    peledre Member

    Mar 25, 2001
    Sioux Falls, SD
    Club:
    Chicago Fire
    Nat'l Team:
    United States
    Not personally no, my company doesn't yet offer a roth 401(k) option. When they do I'll complete a more thorough analysis of my personal situation.
     
  2. capitalist

    capitalist New Member

    Nov 13, 2004
    That makes sense. Hopefully you're company will add the Roth option soon.

    I'm sure that once you do the math, you'll see that the Roth 401(k) is clearly the better option.
     
  3. capitalist

    capitalist New Member

    Nov 13, 2004
    That's exactly why the Roth 401(k) is the better option.

    Assume this scenario when you retire:

    You'll get 25K in Social Security
    Your wife will get 20K in SS
    You get, say, 10K in pensions

    You need another 20K/yr to cover your expenses/travel/etc.

    You take a 401(k) withdrawal for 20K

    Next year, April 15th, you have to pay taxes on the 401(k) and possibly on a portion of your SS. You have to draw down on your 401(k) to pay the taxes, which will result in more taxes next year.
     
  4. wolfp10

    wolfp10 Member

    Sep 25, 2005
    I currently have a traditional 401k plan through my employer. I currently contribute 6% of my net pay towards the plan, with company matching 50% of that. For a little background, I am 23, and will become married in November, if that provides any context.

    1. Outside of my 401k, can I open a Roth IRA to contribute towards my retirement?
    2. Would you recommend a Roth IRA in addition to a 401k plan?
     
  5. capitalist

    capitalist New Member

    Nov 13, 2004
    1. YES. Most people with earned income and "modified adjusted gross income" below $110,000 ($165,000 for married couples filing jointly) are eligible to contribute to a Roth IRA.

    2.) YES, however, if your employer offers Roth 401(k), that's a better option.
     
  6. the shelts

    the shelts Member+

    Jun 30, 2005
    Providence RI
    Club:
    Nottingham Forest FC
    Guys and Girls,

    VERY Few companies offer a ROTH 401k today. VERY FEW. Don't confuse a ROTH 401k with an After Tax 401k contribution. They are two seperate animals.

    A true Roth 401K is offered by under 1000 companies in the US. Most brokerage firms DO NOT offer them. This is because of the sunset provision of the Roth and the Roth IRA 'interpretation' of the IRS which has not been released.

    I think a lot of you are thinking of a 401K plan and the After Tax contribution. This DOES NOT grow tax free like a true Roth IRA or Roth 401k. The money placed in the account maintains a 'cost basis' and the earnings are taxable when you pull out.


    Whatever the beast, if I can give anyone any info, the best coarse of action by any expert is to max your own contribution to get the maximum company match.
     
  7. Cascarino's Pizzeria

    Apr 29, 2001
    New Jersey, USA
    The Pension Protection Act made Roth 401(k)s permanent. Many companies do not yet offer the Roth 401(k) option but I'll bet it's many more than 1,000 nationwide since they were able to start adding the Roth in 2006. If you really want one, just ask your employer to consider it. It's basically a recordkeeping function on the part of the service provider and all the big ones have been ready for the changes. What may scare employers is educating their employees but there are plenty of brochures and online calculators out there.

    Contributions and earnings are NOT taxable if you have a qualified distribution. A qualified distribution is one that occurs when A) you reach age 59 1/2, become disabled or die AND B) the money has been in the account for at least 5 years. Non-qualified distributions will result in a tax on the earnings, not on the original after-tax contribution. Also keep in mind that you cannot roll your Roth IRA into your Roth 401(k). For those approaching retirement who have a Roth 401(k) account, it would be a good idea to establish a Roth IRA so you can continue the 5 year holding period. Otherwise the rollover from the Roth 401(k) to the Roth IRA will establish a new 5 year holding period which is frankly a pain in the azz.
     
  8. Geoduck

    Geoduck Member

    Sep 24, 1999
    I'm a little confused about the contribution and compensation limits for traditional 401(k)s and Roth IRAs. The website in the original post says the trad. 401(k) limit is $15,500 up to a max income of $225,000. I thought the $15,500 limit went up to an income of around $100,000, and then tapered down as income went higher? What happens if my contributions go over the limit - do I get a tax penalty, do I have to withdraw the contribution, etc.? The same questions apply more or less to my Roth IRA; I plan to contribute the maximum $5000 next year, but I'm worried about my income going over the limit.

    Also, is there an appreciable difference in the 401(k) account value after 30 years if I try to frontload my annual contributions at the beginning of the year? I'm thinking about allocating the maximum allowed percentage from my paycheck to my 401(k) until I reach the annual max dollar amount.

    Thanks in advance. I'm sure I'll have more questions. :eek:
     
  9. peledre

    peledre Member

    Mar 25, 2001
    Sioux Falls, SD
    Club:
    Chicago Fire
    Nat'l Team:
    United States
    1, There is no income test for 401(k) contributions, you can contribute up to 15,500 this year if you are under 50.
    2, I don't know what would happen if your contributions go over the limit, my employer has a fail safe in place so that you cannot do that.
     
  10. peledre

    peledre Member

    Mar 25, 2001
    Sioux Falls, SD
    Club:
    Chicago Fire
    Nat'l Team:
    United States
    As to the 2nd part of your question, about Front-Loading contributions, it makes a big difference, I created an example file for you:

    Year One
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $15,000.00
    Rate of Return 8%
    Gain $1,200.00
    Total $16,200.00

    Year Two
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $21,200.00
    Rate of Return 8%
    Gain $1,696.00
    Total $22,896.00

    Year Three
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $27,896.00
    Rate of Return 8%
    Gain $2,231.68
    Total $30,127.68

    Year Four
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $35,127.68
    Rate of Return 8%
    Gain $2,810.21
    Total $37,937.89

    Year Five
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $42,937.89
    Rate of Return 8%
    Gain $3,435.03
    Total $46,372.93

    Year Six
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $51,372.93
    Rate of Return 8%
    Gain $4,109.83
    Total $55,482.76

    Year Seven
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $60,482.76
    Rate of Return 8%
    Gain $4,838.62
    Total $65,321.38

    Year Eight
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $70,321.38
    Rate of Return 8%
    Gain $5,625.71
    Total $75,947.09

    Year Nine
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $80,947.09
    Rate of Return 8%
    Gain $6,475.77
    Total $87,422.86

    Year Ten
    Jan. 1 Contribution

    Contribution $5,000.00
    New Balance $92,422.86
    Rate of Return 8%
    Gain $7,393.83
    Total $99,816.69
    ----------------------------------------------

    Year One
    Dec. 31 Contribution

    Balance $10,000.00
    Rate of Return 8%
    Gain $800.00
    Contribution $5,000.00
    Total $15,800.00

    Year Two
    Dec. 31 Contribution

    Balance $15,800.00
    Rate of Return 8%
    Gain $1,264.00
    Contribution $5,000.00
    Total $22,064.00

    Year Three
    Dec. 31 Contribution

    Balance $22,064.00
    Rate of Return 8%
    Gain $1,765.12
    Contribution $5,000.00
    Total $28,829.12

    Year Four
    Dec. 31 Contribution

    Balance $28,829.12
    Rate of Return 8%
    Gain $2,306.33
    Contribution $5,000.00
    Total $36,135.45

    Year Five
    Dec. 31 Contribution

    Balance $36,135.45
    Rate of Return 8%
    Gain $2,890.84
    Contribution $5,000.00
    Total $44,026.29

    Year Six
    Dec. 31 Contribution

    Balance $44,026.29
    Rate of Return 8%
    Gain $3,522.10
    Contribution $5,000.00
    Total $52,548.39

    Year Seven
    Dec. 31 Contribution

    Balance $52,548.39
    Rate of Return 8%
    Gain $4,203.87
    Contribution $5,000.00
    Total $61,752.26

    Year Eight
    Dec. 31 Contribution

    Balance $61,752.26
    Rate of Return 8%
    Gain $4,940.18
    Contribution $5,000.00
    Total $71,692.44

    Year Nine
    Dec. 31 Contribution

    Balance $71,692.44
    Rate of Return 8%
    Gain $5,735.40
    Contribution $5,000.00
    Total $82,427.84

    Year Ten
    Dec. 31 Contribution

    Balance $82,427.84
    Rate of Return 8%
    Gain $6,594.23
    Contribution $5,000.00
    Total $94,022.06
     
  11. VFish

    VFish Member+

    Jan 7, 2001
    Atlanta, GA
    Club:
    Atlanta
    Depends on whether or not his employer allows him to dump after-tax dollars into his 401k. Mine doesn't (?), but even if he can he'd be better off diverting that money into a ROTH (if eligible).

    Geoduck, if your ROTH contributions exceed your eligible limit you'll have to take a distribution and file a 1099-R. This can be problematic in volatile markets. For example, say you dumped $5k into the ROTH which you promptly invested. If market drops 20% you're assets are now worth only $4000 but you'll still have to take a $5000 distribution. To add insult to injury, since this a ROTH, you can’t get the IRS help offset the loss by taking a write off.
     
  12. VFish

    VFish Member+

    Jan 7, 2001
    Atlanta, GA
    Club:
    Atlanta
    GeoDuck, unless you have a sophisticated or active investing strategy I'd suggest you "dollar-cost-average" your money into the market, spreading out your invests evenly throughout the year. For example, if you get paid bi-monthly dump $650 into your 401k every paycheck.
     
  13. Footer Phooter

    Jul 23, 2000
    Falls Church, VA
    Do you get an employer match? Because if you do, and you frontload too much, you could lose that match later in the year. I know where I work, they cut off your contributions once you reach the annual limit, and if you don't contribute 5% each paycheck, you lose the corresponding 5% match for that paycheck.
     

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