GreenReaper (greenreaper) wrote,

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Research on the Roth 401(k) vs. traditional 401(k)

If you are in the position to choose between a Roth 401(k) and a traditional (deductible) 401(k) at work, then you might be interested in this analysis by Vanguard researchers.

The gist is that it's something of a toss-up, and that selection of appropriate investments (i.e. not just putting it into money market funds or penny stocks) and just plain saving extra makes far more of a difference. However, certain groups can benefit from or should avoid the new option.

The Roth 401(k) is particularly suited to people who really want to save the maximum and are hitting the contribution limits, people who think tax rates are going to go up (married couples who are more likely to be at 10% or 15% particularly so), and those who have so much income that they are unable to take out a Roth IRA.

Those who probably shouldn't make use of the Roth 401(k) relate to those who lose out by paying more in tax now. This includes low-income families paying no tax right now and who qualify for the EITC/retirement savings/Hope/lifetime learning and other credits (which you might lose if your AGI increases), those who have made an unusual amount of money in any particular year, and most importantly those who really don't have much saved and will only be able to replace around 50-70% of their employment income with their savings after retirement.

For everyone else? A mix is a good idea, to hedge against the risk of taxes changing either way in the future. Most taxpayers can achieve this by the standard formula of 401(k) to the matching amount and then funding a Roth IRA - so many of you may already be doing the right thing. I'm stuck with that, too, because MassMutual isn't offering the Roth 401(k). Once they do, well, we'll see . . .
Tags: money
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