A Blog About My Life’s Lessons

My employer, National Instruments, has just recently given employees the option of contributing to both a regular 401k and a Roth 401k.  To be honest, this is new territory for me and I haven’t done enough research into what is best for me. So, I’ve been dragging my feet a little and have not started taking advantage of the Roth 401k.  

Today, I ran across this article on cnn.com, titled Timing Uncle Sam’s take from your nest egg.  This was a very nice article on the tax advantage comparison of the Roth 401k and the Regular 401k.   It addressed a lot of the issues that I’ve been struggling with and confirmed that their is no clear answer to which account you should choose. Here of a couple nuggets I pulled out:

1. Congress, in its wisdom, decided to make the maximum dollar contribution limits the same for regular 401(k)s and Roth 401(k)s. For 2008 that limit is $15,500 (I’m definitely not putting that amount in, but hope to someday). However, if you were to contribute to the limit, of $15,500, after taxes to your Roth 401(k). To contribute the equivalent amount in pre-tax dollars to a regular 401(k), you would have to sock away $20,667 (assuming 25% tax bracket).   Thus, the Roth allows you put away more money each year (again assuming your putting in the max).
2. It’s very difficult to decide how much to put into each account because it depends on your tax bracket when you retire.  Your future tax bracket,of course, depends on a lot of factors, including your career trajectory, the amount of money you save for retirement and, perhaps the biggest wildcard of all, what tax laws Congress passes in the future.
3. If your starting from scratch, the best recommendation is to hedge your bets by divvying up your contribution. For example,  a 60-40 split with 60% going to the regular 401(k) as a starting guideline. If you think you’re more likely to end up in a lower tax bracket in retirement, then maybe you tilt to 65% or 70% in favor of the regular 401(k). For me, who has a majority of my retirement funds in my regular 401k, its probably best to put more in the Roth to help balance out my portfolio from tax perspective.   My gut tells me that in 30 yrs, we will be paying a lot more taxes.

Are there any lessons you’ve learned about these different retirement vehicles?