In this slideshare we talk about the differences between the traditional 401k and the Roth 401k. We give examples of both of them and discuss when each makes sense.
5. Assumptions:
Income: $60,000
Pre-retire tax rate: 25%
Post-retire tax rate: 20%
Contribution: 10%*
Roth
Traditional
Income:
Taxes:
Net Pay:
CONTRIBUTION:
$60,000
$15,000 ($60,000 * 25%)
$45,000
$4,500 ($45,000 * 10%)
Income:
CONTRIBUTION:
Taxable Income:
Taxes:
Net Pay:
$60,000
$6,000 ($60,000 * 10%)
$54,000
$13,500 ($54,000 * 25%)
$40,500
Working
Years
Taxes are LESS in the
traditional because
they are calculated on
the amount minus the
contribution
6. Assumptions:
Growth Rate: 6%
Years till Retirement: 30
Growth of Monies
(in 30 years)
Roth Traditional
Contributed:
$4,500
Contributed:
$6,000
Grew to: $27,846
Grew to: $34,461
8. Assumptions:
Income: $60,000
Pre-retire tax rate: 25%
Post-retire tax rate: 20%
Contribution: 10%*
Roth
Growth of Monies
Taxes
Net Withdrawal
Traditional
$25,846 $34,461
$6,892
$27,569
$0
$25,846
9. So, it looks like the
traditional was
better there. Right?
Yeah. But the tax rates
were higher for the
pre-retire stage. Let's
switch that up to see if
anything changes.
10. Roth vs. Traditional 401k
Example 2
Assumptions
Income:
Pre-retire tax rate:
Post-retire tax rate:
Contribution:
$60,000
20%
25%
10% (of pre-tax income for
traditional&ofpost-taxincomefor
Roth
Pre-retire tax rate is
now lower than the
post-retire tax rate
12. Assumptions:
Income: $60,000
Pre-retire tax rate: 20%
Post-retire tax rate: 25%
Contribution: 10%*
Roth
Traditional
Income:
Taxes:
Net Pay:
CONTRIBUTION:
$60,000
$12,000 ($60,000 * 20%)
$48,000
$4,800 ($45,000 * 10%)
Income:
CONTRIBUTION:
Taxable Income:
Taxes:
Net Pay:
$60,000
$6,000 ($60,000 * 10%)
$54,000
$10,800 ($54,000 * 20%)
$43,200
Working
Years
Contribution is
GREATER due to taxes
being LESS in this
example
13. Assumptions:
Growth Rate: 6%
Years till Retirement: 30
Growth of Monies
(in 30 years)
Roth Traditional
Contributed:
$4,800
Contributed:
$6,000
Grew to: $27,569
Grew to: $34,461
15. Assumptions:
Income: $60,000
Pre-retire tax rate: 20%
Post-retire tax rate: 25%
Contribution: 10%*
Roth
Growth of Monies
Taxes
Net Withdrawal
Traditional
$27,569 $34,461
$8,615
$25,846
$0
$27,569
16. Now the Roth has a
higher amount...
What's the takeaway?
17. The WHY
Ordinary tax rate today
Ordinary tax rate when you
withdraw funds
If tax rates are
expected to be
higher when funds
are withdrawn then
tax rates are for
you today... the
traditional 401k
would be a better
option
18. The WHY
Ordinary tax rate today
Ordinary tax rate when you
withdraw funds
If tax rates are
expected to be higher
today compared to
tax rates when you
plan to withdraw
funds... the Roth 401k
would be a better
option