Roth 401(k) or Traditional 401(k)?
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Roth 401(k) or Traditional 401(k)? |
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A 401(k) 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when the money is withdrawn.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 the Traditional 401(k), where deposits are made on a pre-tax basis but
are subject to taxes when the money is withdrawn. Use this calculator to help determine
the best option for your retirement. |
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Definitions |
- Current age
- Your current age.
- 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 2007 is $15,500. If you are
over 50, a "catch-up" provision allows you to contribute even more to your 401(k).
In 2007, employees over 50 can deposit an additional $5,000 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 after 2007.
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 your salary for
the previous plan year was above $100,000, you may need to contact your employer
to see if these additional contribution limits apply to you.
- 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 dependant on the type of
investments you select. From January 1970 to December 2006, the average compounded
rate of return for the S&P 500, including reinvestment of dividends, was approximately
11.5% per year (source: www.standardandpoors.com). During this period, the highest
12-month return was 61%, and the lowest was -39%. Savings accounts at a bank pay
as little as 1% or less.
It is important to remember that future rates of return can't be predicted with
certainty and that investments that pay higher rates of return are 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 additional sales
charges and fees that funds may charge.
- 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.
- 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.
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Filing Status and Income Tax Rates 2007
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Tax rate |
Married filing jointly
or Qualified Widow(er) |
Single |
Head of household |
Married filing separately |
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10% |
$0 - 15,650
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$0 - 7,825
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$0 - $11,200
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$0 - 7,825 |
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15%
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$15,651- 63,700
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$7,826- 31,850
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$11,201- 42,650
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$7,826- 31,850 |
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25% |
$63,701- 128,500
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$31,851- 77,100
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$42,651- 110,100
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$31,851- 64,250 |
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28% |
$128,501- 195,850 |
$77,101- 160,850
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$110,101- 178,350
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$64,251- 97,925 |
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33% |
$195,851- 349,700
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$160,851- 349,700 |
$178,351- 349,700
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$97,926- 174,850 |
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35% |
over $349,700
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over $349,700
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over $349,700
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over $174,850
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Source: http://www.irs.gov/formspubs/article/0,,id=164272,00.html
- 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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