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Thread: 401K... 401-what?

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    #1

    Help 401K... 401-what?

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    Gaaah! So confused.

    Can someone lay out the difference, in layman's terms, between a Traditional 401K and a Roth 401K for me?

    Maybe do an example (if you can) based on a yearly income of $40,000 with a recommended contribution?

    I dont want to end up screwing myself. I can elect to do BOTH a contribution to a Traditional and a Roth, (which I think I might do), but I don't know if that's best, let alone, the amount I should contribute (total, or half/half).


    Someone helpppp!

    You're welcome.
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    #2
    The biggest difference is one you pay taxes for that $ now when you put it in (so you don't get taxed when you take it out), and the other you pay taxes later on the $ when you take it out (but obviously don't pay taxes on it now).
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    #3
    Quote Originally Posted by His*PITA* View Post
    The biggest difference is one you pay taxes for that $ now when you put it in (so you don't get taxed when you take it out), and the other you pay taxes later on the $ when you take it out (but obviously don't pay taxes on it now).
    I think I've grasped on to that part, but I just cant wrap my head around what would be best, for 40 years down the road, when I'd be retiring

    I also have ZERO clue what to contribute...

    You're welcome.
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    My best guess (limited in this area as it is).... would be if you are in a job/field where you plan on making a decent amount more in the future, therefore putting yourself in a higher tax bracket, it would make sense to pay taxes now while your income is still "low". With no kids and limited responsibilities while your younger, it may be something you are more able to afford now then say 20 years from now when you have many other expenses.

    If you predict that your income will be somewhat steady/not change to drastically, then you could wait and pay them when you come out because what your paying in taxes, in theory, wouldn't change much (which also depends on government and any laws or such they make between now and then).
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    Quote Originally Posted by His*PITA* View Post
    My best guess (limited in this area as it is).... would be if you are in a job/field where you plan on making a decent amount more in the future, therefore putting yourself in a higher tax bracket, it would make sense to pay taxes now while your income is still "low". With no kids and limited responsibilities while your younger, it may be something you are more able to afford now then say 20 years from now when you have many other expenses.

    If you predict that your income will be somewhat steady/not change to drastically, then you could wait and pay them when you come out because what your paying in taxes, in theory, wouldn't change much (which also depends on government and any laws or such they make between now and then).

    See, I wouldn't have even thought of that! That's a GREAT point. I kinda liked the idea of paying taxes more now anyways, because I'd rather just get it out of the way, but I really couldn't think of any other reason why. But, what you suggested makes financial sense!

    You're welcome.
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    Ok. Typing this on my iPad is gonna suck so I apologize fr any typos.

    First off are you sure we are talking about 401k's and not IRAs? Is easy to get them mixed up.

    The Roth acct is a post tax acct, so the money contributed is already taxed when put in. But when you make distributions later on down the road any money you take it is not taxed as part of your income. The beauty with that acct is you put the money in, let it grow, and then take out the money tax free when you are retired. Example, contribute $1000 of already taxed money. The $1000 grows to $20,0000. You have $19,000 that you never have to pay taxes on because you already paid the taxes on the $1,000 when you contributed to the acct. Roth contributions are not tax deductible.

    The traditional acct the money is not taxed when you contribute. But when you take it out it is taxed as part of your income. The thinking is that when you take it out when you are retired you will be in a lower tax bracket because you are not working. Also, contributions to a traditional acct are ALWAYS tax deductible to the tax year that those contributions are are designated for.

    You just have to see what makes sense. Feel free to PM me with questions. I work in retirement and estate planning.
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    #7
    Oh the tax deductible thing, forgot about that! Thats another big difference!
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    #8
    Quote Originally Posted by katiebee View Post
    Ok. Typing this on my iPad is gonna suck so I apologize fr any typos.

    First off are you sure we are talking about 401k's and not IRAs? Is easy to get them mixed up.

    The Roth acct is a post tax acct, so the money contributed is already taxed when put in. But when you make distributions later on down the road any money you take it is not taxed as part of your income. The beauty with that acct is you put the money in, let it grow, and then take out the money tax free when you are retired. Example, contribute $1000 of already taxed money. The $1000 grows to $20,0000. You have $19,000 that you never have to pay taxes on because you already paid the taxes on the $1,000 when you contributed to the acct. Roth contributions are not tax deductible.

    The traditional acct the money is not taxed when you contribute. But when you take it out it is taxed as part of your income. The thinking is that when you take it out when you are retired you will be in a lower tax bracket because you are not working. Also, contributions to a traditional acct are ALWAYS tax deductible to the tax year that those contributions are designated for.

    You just have to see what makes sense. Feel free to PM me with questions. I work in retirement and estate planning.
    Yeah, I just double-checked because for a minute, I thought maybe I was wrong, but I'm looking at the paper-work from my work and it says, "401K Plan Highlights". So 401Ks it is!

    What exactly does it mean for either account to be/not be "tax deductible"? This is my first "job" outside of things like internships/minimum wage jobs. I never have done many things when doing taxes, besides input numbers from my W2s...

    You're welcome.
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    #9
    If you are young and in a low tax bracket Roth accts are AWESOME. They are so powerful for retirement saving. Also, any money you contribute to a Roth you can always take out tax and penalty free just in case you have to dip into the account. But it's only your contributions that fall into that rule. Any earnings have a holding period on them before they are free to take out. Also, Roth accounts do not have a required distribution schedule when you turn 70 1/2 like a traditional account does.

    Traditional accts make more sense if you are currently in a higher tax bracket but anticipate moving to a lower one when you start taking distributions. And the tax deduction you get is nice.

    Also, it's always good to talk to a tax advisor or CPA if you are not sure what would be best for you and your family.
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    #10
    Quote Originally Posted by sasha*ba View Post
    Yeah, I just double-checked because for a minute, I thought maybe I was wrong, but I'm looking at the paper-work from my work and it says, "401K Plan Highlights". So 401Ks it is!

    What exactly does it mean for either account to be/not be "tax deductible"? This is my first "job" outside of things like internships/minimum wage jobs. I never have done many things when doing taxes, besides input numbers from my W2s...
    Tax deductible means that any contributions you make you can claim as a deduction against your taxable income. So if you contribute $3,000 you can deduct that from your income and then you owe less taxes and are possible moved to a lower tax bracket.

    OK so it's def 401k accts. I work mainly with IRAs so the early distribution rules I mentioned earlier with the Roth may not be correct with the 401k acct. but t
    he general ideas of the accts are the same and the rules regarding taxing are the same as well.

    Read the pamphlet you have and make sure you understand the gist of the two accts.
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