401k contributions: pre/post tax and roth.
 

I am 22 and at my first full time job. I am now eligible to enroll in my companies 401k. They contribute 2% of your salary plus 100% of your contributions up to 6%, and the possibility of another 2% if we hit our goals. I plan on contributing 10% out of my pay.

I am very comfortable picking the funds and such. My question is what % of my contributions do I want to be pre-tax, post-tax, and roth401k. I see there are penalties for withdrawing before 59.5 years old for the pre-tax and roth. I don’t want all my money tied up until then.

Obviously 6% will be going into the 401k one way or another to get the match, with another 4% going somewhere. My question is what is the best way to allocate my contributions between pre, post, and roth? Or should the 4% go into some other form of investment? I am an actuarial analyst and make pretty decent money for someone my age, with the possibility to make a lot more if I continue to pass exams, so I would like to have the option to retire before age 59.5, thus not have the early withdraw penalties.

Re: 401k contributions: pre/post tax and roth.
 

max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

Re: 401k contributions: pre/post tax and roth.
 

If you are going to have a lot of disposable income (and it sounds like you will), definitely make sure you get the full 4K in your Roth.

6% for sure goes to 401(k), then fill the Roth, then come back to 401(k) if you like, or buy independent mutual funds. I believe the Roth gives one the ability to retire slightly before 59.5 (because you can pull your Contributions out at any time for any reason tax and penalty-free). So at age 55, you'd have ((55-22)*4K) = $132,000 to start drawing from to bridge the gap to age 59.5. That is, if you don't have independent mutual funds to go with it. Also, the 4K yearly limit will rise so it should be more than 132K to draw from.

All-in-all, a 6% match on top of 2% guaranteed is an exceptional 401(k) plan. Make good use of it.

Re: 401k contributions: pre/post tax and roth.
 

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If you are going to have a lot of disposable income (and it sounds like you will), definitely make sure you get the full 4K in your Roth.

6% for sure goes to 401(k), then fill the Roth, then come back to 401(k) if you like, or buy independent mutual funds. I believe the Roth gives one the ability to retire slightly before 59.5 (because you can pull your Contributions out at any time for any reason tax and penalty-free). So at age 55, you'd have ((55-22)*4K) = $132,000 to start drawing from to bridge the gap to age 59.5. That is, if you don't have independent mutual funds to go with it. Also, the 4K yearly limit will rise so it should be more than 132K to draw from.

All-in-all, a 6% match on top of 2% guaranteed is an exceptional 401(k) plan. Make good use of it.

[/ QUOTE ]When you say Roth are you refering to an IRA of the Roth 401k? My companies 401k is run by Fidelity. Would going to a "Fidelity Investor Center" to talk to an advisor be my best option, or should I seek out a financial advisor on my own?

Re: 401k contributions: pre/post tax and roth.
 

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max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

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I think both of OP's options are tax advantaged here. I'd do what's necessary to get my company matching post tax (Roth 401k) dollars, as they are worth more than pre tax (401k) dollars.

You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.

Re: 401k contributions: pre/post tax and roth.
 

Get the free moneys by maxing out your 401k.

Then max your Roth.

Then double dip your 401k.

Re: 401k contributions: pre/post tax and roth.
 

What is my best recourse on finding the rules on early withdrawals (say 55 for example)? Fidelity has a million FAQ on their site, but all I have found only says there are penalties for early withdrawal, nothing specific. I don’t like the thought of having a large 401k that I can’t touch until I am 59.5 without large penalties. Given the career I am going into I probably won’t want to retire before 60, but at the same time I want to have the option. Obviously a large portion of my savings will be pre-tax and Roth, but I would like to have something else that I can use if I decide to retire in my 50’s. Also is it possible for the rules to change and the 59.5 year age restriction goes higher, or is that set for good?

Re: 401k contributions: pre/post tax and roth.
 

[ QUOTE ]
Get the free moneys by maxing out your 401k.

Then max your Roth.

Then double dip your 401k.

[/ QUOTE ]When you say max out the 401k you mean 6% to get the free money right? Also when you say Roth are you refering to the Roth IRA or Roth 401k? Thanks

Re: 401k contributions: pre/post tax and roth.
 

I think people here are missing the fact that a Roth 401k is different from a 401k.

Are the matching rules the same for both in your company? Mine doesn't offer a Roth 401k yet.

So investing in a Roth IRA is a good idea. But that will only leave you with 4k x # of years worked to withdraw without penalty. (Limits will go up, but this is assuming they are roughly in line with inflation)

Also consider the fact that you might not be working as an Actuary until you're 60, but it's likely that you will still be working in some facility. At least you should find some passive income that will let your tax advantaged investments mature.

Also, I have no idea what the rules are like for a Roth 401k. They're not very popular yet, so yes, I think calling and asking an advisor about it is a good idea.

Re: 401k contributions: pre/post tax and roth.
 

[ QUOTE ]
You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.


[/ QUOTE ] This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?

Re: 401k contributions: pre/post tax and roth.
 

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[ QUOTE ]
You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.


[/ QUOTE ] This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?

[/ QUOTE ]
If it's a Roth IRA (and I'd assume Roth 401k, but don't quote me) everything you've amassed is completely tax free at age 59.5.

Qualified distributions from a traditional 401k after age 59.5 will be taxed at your ordinary income tax rate.

So picture a world where tax laws are the exact same 40 years from now and you want to retire. We'll talk tax deferred vs Roth. Not 401 vs IRA.

Scenario A- you're in the 28% tax bracket and you've saved just enough to live on. In 2007 dollars your distributions are less than they are now and therefore you're in a lower tax bracket. If you went the Roth route you paid higher taxes on this money because it was already taxed at 28% when it could now be taxed at 15%.

Scenario B- You've worked hard and saved millions and are ready to retire rich. Your distributions are now much more than your income in 2007 was (in 2007 dollars). If you went the Roth route, congratulations instead of paying the 35% tax bracket you saved all this money at the 28% tax bracket.

What scenario do you envision? Revisit this and plan accordingly in 5 years, and in 10, etc. etc. It sure can't hurt to have a mix of both since tax brackets could be different when you're retired. Also 401ks have stricter minimum distributions, so you could be forced to take money out when you don't want to to avoid penalties.

This is my understanding of things. I could be way off base here. Hopefully others will confirm or call me an idiot.

Re: 401k contributions: pre/post tax and roth.
 

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This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?

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Also, you might be thinking Long Term Capital Gains, which are not tax advantaged. LTCGs are taxed at a lower rate than Short Term Cap. Gains. STCGs are taxed at your ordinary income tax rate. That doesn't apply here because these are taxed advantaged accounts. A Roth IRA is like a LTCG investment that you pay ZERO taxes on.

Re: 401k contributions: pre/post tax and roth.
 

So after posting the hell out of this thread- what I'd do if I were you. (After you go thoroughly research Roth 401ks)

1. Get the max match on a Roth 401k
2. Max out a Roth IRA
3. Add some money to a traditional 401k
4. Retire rich

Re: 401k contributions: pre/post tax and roth.
 

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You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.


[/ QUOTE ] This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?

[/ QUOTE ]
If it's a Roth IRA (and I'd assume Roth 401k, but don't quote me) everything you've amassed is completely tax free at age 59.5.

Qualified distributions from a traditional 401k after age 59.5 will be taxed at your ordinary income tax rate.

So picture a world where tax laws are the exact same 40 years from now and you want to retire. We'll talk tax deferred vs Roth. Not 401 vs IRA.

Scenario A- you're in the 28% tax bracket and you've saved just enough to live on. In 2007 dollars your distributions are less than they are now and therefore you're in a lower tax bracket. If you went the Roth route you paid higher taxes on this money because it was already taxed at 28% when it could now be taxed at 15%.

Scenario B- You've worked hard and saved millions and are ready to retire rich. Your distributions are now much more than your income in 2007 was (in 2007 dollars). If you went the Roth route, congratulations instead of paying the 35% tax bracket you saved all this money at the 28% tax bracket.

What scenario do you envision? Revisit this and plan accordingly in 5 years, and in 10, etc. etc. It sure can't hurt to have a mix of both since tax brackets could be different when you're retired. Also 401ks have stricter minimum distributions, so you could be forced to take money out when you don't want to to avoid penalties.

This is my understanding of things. I could be way off base here. Hopefully others will confirm or call me an idiot.

[/ QUOTE ]B, I plan on saving a good amount. I am also engaged, and my fiance makes decent money too (accountant working on CPA). Between the two of us saving 10% per year or more we should be in pretty good shape when retirement comes around.

Re: 401k contributions: pre/post tax and roth.
 

[ QUOTE ]
So after posting the hell out of this thread- what I'd do if I were you. (After you go thoroughly research Roth 401ks)

1. Get the max match on a Roth 401k
2. Max out a Roth IRA
3. Add some money to a traditional 401k
4. Retire rich

[/ QUOTE ]Thanks for the input. Are there penalties for withdrawing from a Roth IRA before 59.5?

Re: 401k contributions: pre/post tax and roth.
 

You will want to verify this with another source (like irs.gov)...

There are penalties for withdrawing <u>earnings</u> but not the <u>contributions</u>. So, if you contribute $100k over the next 20 years and it grows into $500k, you could take out $100k tax-free before reaching 59 1/2.

There is also provisions for withdrawals for the purpose of buying a first home, higher education costs, etc. that you can research.

Re: 401k contributions: pre/post tax and roth.
 

I also have the opportunity to contribute to a Roth 401k instead of a regular 401k. I actually just set up my contributions to the 401k a few days ago without giving much thought to the Roth 401k, knowing that I am planning on maxing out my Roth IRA.

Edit, forgot this part: I am now thinking of switching to a Roth 401k. I guess this means I'll lose 28% of the money off the top, contribute 8% of the remainder and get a 4% match (total 12%). And never pay taxes after I retire, taking money out of my Roth 401k and Roth IRA.

What happens as I move up in salary and my current-tax bracket catches up to my future-tax bracket? Is it possible to switch my contributions to a 401k account while my Roth 401k continues existence?

What happens in the event that I have both a Roth 401k and a 401k (if possible, based on the question above), but for some reason change employers?

Re: 401k contributions: pre/post tax and roth.
 

Yes, it is possible to have both a 401(k) and and Roth 401(k)...I do. It's up to your HR department how (and how often) you can switch your contribution designation. For example, they may require written notification 30 days prior to the end of a calendar quarter.

Just like a regular 401(k), when you change jobs, you have the option of rolling it into a self-directed IRA (a Roth IRA in this case) or into your new employer's plan(s). Personally, I never roll into my new employer's plan because the investment options are usually too limited vs. a self-directed IRA Rollover.

Re: 401k contributions: pre/post tax and roth.
 

Next question: Why would you want a Roth 401k AND a regular 401k? Aren't they polar opposite ways of collecting the company match?

Re: 401k contributions: pre/post tax and roth.
 

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Next question: Why would you want a Roth 401k AND a regular 401k? Aren't they polar opposite ways of collecting the company match?

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I think the main reason for doing so would be the uncertainty of your situation post retirement as well as the uncertainty in what tax environment will be at that time.

Re: 401k contributions: pre/post tax and roth.
 

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max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

[/ QUOTE ]Aren't my tax advantaged accounts in post tax contributions (Roth)?

Re: 401k contributions: pre/post tax and roth.
 

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max out you tax advantaged accounts before contributing post tax. The benefit you get in not paying taxes on it all is HUGE

[/ QUOTE ]Aren't my tax advantaged accounts in post tax contributions (Roth)?

[/ QUOTE ]
Yes, but if they weren't in tax advantaged accounts you'd have to pay taxes again when you cashed in on them (STCG) like I mentioned before.

Re: 401k contributions: pre/post tax and roth.
 

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What is my best recourse on finding the rules on early withdrawals (say 55 for example)?

[/ QUOTE ]

That would be me. [img]/images/graemlins/smile.gif[/img] I just retired (again, but that is a long story) at age 54. I turn 55 this year and had a 401K. Here are the IRS rules on retiring at age 55 (actually in the same year as you turn age 55):

If you terminate employment at the company where you have your 401K you may withdraw the funds with no 10% early withdrawal penalty in one of two ways.
1) Lump sum, you pay taxes at your regular income rate but as I mentioned above no 10% penalty
2. You can do the averaging withdrawal (dependent on your company's plan specs) where you get a percentage of your total 401K value distribution every year based on your projected lifetime formula as used by the IRS. If you choose this method you are still taxed at your regular income rate, no 10% penalty and must take this distribution for a minimum of 5 years before you are able to access the balance of your funds.

Jimbo

Re: 401k contributions: pre/post tax and roth.
 

Not to hijack, but I am in a somewhat similar position. Employer matches 6% to a standard 401k, I am currently contributing 10%. Would I be better off contributing this excess 4% to a Roth IRA?

Re: 401k contributions: pre/post tax and roth.
 

Yeah

Re: 401k contributions: pre/post tax and roth.
 

[ QUOTE ]
Not to hijack, but I am in a somewhat similar position. Employer matches 6% to a standard 401k, I am currently contributing 10%. Would I be better off contributing this excess 4% to a Roth IRA?

[/ QUOTE ]

General rule of thumb: Invest just enough to maximize your employer's match, then max out your Roth IRA next. After that, you can either contribute more to your 401(k) or self-direct those funds elsewhere, whether it be individual stocks, real estate, something else. Each situtation is unique though based on your personal situation.

Re: 401k contributions: pre/post tax and roth.
 

w/ regards to the employer match on a Roth 401k contribution...

http://www.financial-planning.com/pu...050214101.html
There is, however, a twist to the Roth 401(k)s. Employees will place an after-tax amount in contributions to the Roth 401(k). But the employer match for the contribution--up to 3% of income at most companies--will go into a separate regular 401(k) account. This would enable the company to deduct its cumulative match contributions up front from its corporate income taxes.

Essentially, employees would get the benefit of not having to pay taxes on withdrawals from their contributions from the Roth 401(k). But they will have to pay income taxes on withdrawals from the company's contributions, including the earnings that have built up over the years.

Re: 401k contributions: pre/post tax and roth.
 

I wish I had an employer match.

Re: 401k contributions: pre/post tax and roth.
 

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w/ regards to the employer match on a Roth 401k contribution...

http://www.financial-planning.com/pu...050214101.html
There is, however, a twist to the Roth 401(k)s. Employees will place an after-tax amount in contributions to the Roth 401(k). But the employer match for the contribution--up to 3% of income at most companies--will go into a separate regular 401(k) account. This would enable the company to deduct its cumulative match contributions up front from its corporate income taxes.

Essentially, employees would get the benefit of not having to pay taxes on withdrawals from their contributions from the Roth 401(k). But they will have to pay income taxes on withdrawals from the company's contributions, including the earnings that have built up over the years.

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That's still better than income taxes on the whole pile (for me @ 22 yrs old anyway)