Roth 401(k) or Traditional 401(k)?
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qualifying distributions when the money is withdrawn.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taxes when the money is withdrawn.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.
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 2006 is $15,000. If you are over 50, a
"catch-up" provision allows you to contribute even more to your 401(k).
In 2006, 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 2006.
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 $95,000, 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 dependent on the type of investments
you select. The actual rate of return is largely dependant on the type
of investments you select. From January 1970 to December 2005, the
average compounded rate of return for the S&P 500, including
reinvestment of dividends, was approximately 11.4% per year. 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.
- 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.
| Filing Status and Income Tax Rates 2006 |
| Tax rate | Married filing jointly
or Qualified Widow(er) | Single | Head of household | Married filing separately |
| 10% |
$0 - 15,100 |
$0 - 7,550 |
$0 - $10,750 |
$0 - 7,550 |
| 15% |
$15,101- 61,300 |
$7,551- 30,650 |
$10,751- 41,050 |
$7,551- 30,650 |
| 25% |
$61,301- 123,700 |
$30,651- 74,200 |
$41,051- 106,000 |
$30,651- 61,850 |
| 28% |
$123,701- 188,450 |
$74,201- 154,800 |
$106,001 171,650 |
$61,851- 94,225 |
| 33% |
$188,451- 336,550 |
$154,801- 336,550 |
$171,651- 336,550 |
$94,226- 168,275 |
| 35% |
over $336,550 |
over $336,550 |
over $336,550 |
over $168,275 |
Source: IRS Revenue Procedure 2005-70 (http://www.irs.gov/pub/irs-drop/rp-05-70.pdf)
- 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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