This week a client asked a great question about investing and taxes. Here is her email:
“Hi Bob,
I was wondering if you could help me out with a question. My company has decided to offer Roth 401K instead of just traditional. If I stuck with my traditional 401K do you know what my tax savings would be, in one full year? I’m trying to decide if it’s worth it to have a Roth 401k and Roth IRA.
Anyway, just let me know when you have some time, I know it’s very busy during tax season.
Thank you”
Here is my response:
“It's definitely worth doing a Roth 401k. You receive no tax break now on the Roth 401K contributions, but they grow tax free. With a regular 401k, you receive a tax break now, but not on the growth.
Given your tax situation:
$5000 in 401k contributions
Current tax savings ~$1500
$5000 grows to ~$50,000 at retirement
Future tax bill of ~$15,000
$5000 in Roth 401k contributions
No tax savings now
$5000 grows to ~$50,000 at retirement
Future tax savings of ~$15,000
In your scenario, you could save $13,500 in taxes by using a Roth 401k and that’s with just $5000 in vested in one year.
Hope this helps, Bob”
If you haven’t figured it out yet, we’re big fans of all things Roth here at Management Accounting! If your company doesn’t have a Roth 401k option yet, make time this week to talk to a decision maker about adding that option.
