Roth 401(k) vs. Traditional 401(k)

A 401(k) contribution can be an effective retirement tool. As of January 2006, there is a new type of 401(k) - the Roth 401(k). The Roth 401(k) allows you to contribute to your 401(k) account on an after-tax basis - and pay no taxes on qualifying distributions when the money is withdrawn. For some investors, this could prove to be a better option than contributing on a pre-tax basis, where deposits are subject to taxes when the money is withdrawn. Use this calculator to help determine the best option for your retirement.

MSG_GO

RESULTS_MSG **GRAPH**

How was this calculated?

Step 1: First we found the value of a Roth 401(k) if you contributed ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This equaled TOTAL_ROTH. Since qualified withdrawals from a Roth 401(k) are not taxed, the total value remains TOTAL_ROTH.

Step 2: We then computed the totals for a traditional 401(k). Again we determined the value of ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This is the same amount as the Roth 401(k) total, V401K_TOTAL_BF_TAX. However, contributions and all earnings in a traditional 401(k) are taxable when they are withdrawn. After taxes, the value of your traditional 401(k) account would be V401K_TOTAL_AF_TAX.

Step 3: Since you receive a current year tax deduction for any traditional 401(k) contributions, we need to determine the value of investing this tax savings and add this amount to the traditional 401(k) total. If we forget this step, our comparison will not be equal. We would, in effect, be contributing more to our Roth 401(k) than the traditional 401(k). If your tax savings were invested for YEARS_UNTIL_RETIREMENT years at an assumed rate of RATE_OF_RETURN, this returns a total of TOTAL_TAXABLE after taxes.

Results Summary
 Traditional 401(k)Roth 401(k)
Total contributions
MSG_CONTRIBUTE_LBL
TOTAL_CONTRIBUTIONSTOTAL_CONTRIBUTIONS
Total before taxesV401K_TOTAL_BF_TAXTOTAL_ROTH
Value of investing tax savings+ TOTAL_TAXABLE+ 0
Taxes for 401(k) at retirement- V401K_TOTAL_TAXES- 0
Value at retirement (age AGE_OF_RETIREMENT)TOTAL_401KTOTAL_ROTH
RESULTS_MSG
Input Summary
Annual contribution*
MSG_CONTRIBUTE_LBL
ANNUAL_CONTRIBUTIONCurrent ageCURRENT_AGE
Years until retirementYEARS_UNTIL_RETIREMENTAge of retirementAGE_OF_RETIREMENT
Expected rate of returnRATE_OF_RETURN  
Current tax rateCURRENT_TAX_RATERetirement tax rateRETIREMENT_TAX_RATE

*The annual maximum for 2014 is $17,500. If you are age 50 or over, a "catch-up" provision allows you to contribute even more to your 401(k). Employees age 50 or over can deposit an additional $5,500 into their 401(k) account. It is also important to note that employer contributions do not affect an employee's maximum annual contribution limit.

**GRAPH**

401(k) Balances by year

**REPEATING GROUP**

Roth 401(k) vs. Traditional 401(k) Definitions

Current age
Your current age.
Age of retirement
Age you wish to retire. This calculator assumes that the year you retire, you do not make any contributions to your 401(k). So if you retire at age 65, your last contribution happened when you were actually 64.
Annual contribution
The amount you will contribute to a 401(k) each year. This calculator assumes that you make 12 equal contributions throughout the year at the beginning of each month. The annual maximum for 2014 is $17,500. If you are age 50 or over, a 'catch-up' provision allows you to contribute even more to your 401(k). Employees age 50 or over can deposit an additional $5,500 into their 401(k) account. It is also important to note that employer contributions do not affect an employee's maximum annual contribution limit. Both the annual maximum and 'catch-up' provisions are indexed for inflation.

It is important to note that some employees are subject to another form of contribution limits. Employees classified as 'Highly Compensated' may be subject to contribution limits based on their employer's overall 401(k) participation. If you expect your salary to be $115,000 or more in 2014 or was $115,000 or more in 2013, you may need to contact your employer to see if these additional contribution limits apply to you.

Invest traditional tax-savings
Check this box to invest any tax savings generated by contributions to a traditional 401(k). By investing your taxes savings each year you equalize the total cash flow between the two account types. For example, if you have a 25% income tax rate and contribute $1,000 to your retirement account the actual cost after taxes would be $750 for the traditional contribution and $1,000 for the Roth contribution. If you do not to invest the difference, you are actually "spending" more per year with the Roth option and end result will greatly favor a Roth type savings plan. You may wish to leave this box unchecked if you have no ability or desire to create an additional investment account outside of your 401(k).
Maximize contributions
Check this box to increase all contributions to the maximum allowed each year. This will include future years that qualify for catch-up contributions. The annual maximum for 2014 is $17,500. When you reach age 50 or over, a 'catch-up' provision increases the maximum by an additional $5,500.
Expected rate of return
The annual rate of return for your 401(k) account. This calculator assumes that your return is compounded annually and your deposits are made monthly. The actual rate of return is largely dependent on the types of investments you select. The S&P 500® for the 10 years ending Dec. 31st, 2013 had an annual compounded rate of return of 7.3%, including reinvestment of dividends. From January 1970 through the end of 2013, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.6% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Current tax rate
The current marginal income tax rate you expect to pay on your taxable investments. Use the table below to assist you in determining your current tax rate. Use the table below to assist you in estimating your Federal 2014 tax rate.
Filing Status and Income Tax Rates 2014*
Tax RateMarried Filing Jointly or Qualified Widow(er)SingleHead of HouseholdMarried Filing Separately
10%$0 - $18,150$0 - $9,075$0 - $12,950$0 - $9,075
15%$18,150 - $73,800$9,075 - $36,900$12,950 - $49,400$9,075 - $36,900
25%$73,800 - $148,850$36,900 - $89,350$49,400 - $127,550$36,900 - $74,425
28%$148,850 - $226,850$89,350 - $186,350$127,550 - $206,600$74,425 - $113,425
33%$226,850 - $405,100$186,350 - $405,100$206,600 - $405,100$113,425 - $202,550
35%$405,100 - $457,600$405,100 - $406,750$405,100 - $432,200$202,550 - $228,800
39.6%over $457,600over $406,750over $432,200over $228,800
*Caution: Do not use these tax rate schedules to figure 2013 taxes. Use only to figure 2014 estimates. Source: 2014 tax brackets http://www.irs.gov
Retirement tax rate
The marginal tax rate you expect to pay on your investments at retirement.
After tax total at retirement
For the Roth 401(k), this is the total value of the account. For the traditional 401(k), this is the sum of two parts: 1) The value of the account after you pay income taxes on all earnings and tax deductible contributions and 2) what you would have earned if you had invested (in an ordinary taxable account) any income tax savings.


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