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Old 02-11-2015, 11:14 PM
 
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In terms of tax advantage, a Roth 401(k) works like a Roth IRA and a traditional 401(k) works like a traditional IRA. So why the difference in contribution preference? What am I missing here?
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Old 02-12-2015, 01:41 AM
 
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a few factors at play here...

most people work so they take advantage of their employer's pre-tax 401k or roth 401k. roth 401k is a little more new so many people don't even know it's an option for them if their employer has it as an option. many employers don't.

1) some people don't know that they can do a roth 401k so they do pre-tax.
2) some people work at companies where they can't do a roth 401k so they do pre-tax.
3) some people know they can do a roth 401k but choose to do pre-tax anyway because they are in a high tax bracket

a traditional ira is tax deductible if you don't have an employer 401k. but if you don't have an employer 401k, you probably aren't working a high paying job so your tax rate is pretty low so you want to get taxed now and defer taxes on growth and withdrawl.

4) some people don't have an employer 401k available so they can do a tax deductible tIRA or a roth ira.
5) most people who don't have an employer 401k are in a low tax brack so they do a roth ira

just my speculation.
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Old 02-12-2015, 02:26 AM
 
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roth 401k's are newer and didn't exist prior.

most humans like instant gratification so they want their tax deduction , although for many younger workers that could be a costly mistake.
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Old 02-12-2015, 04:03 AM
bUU
 
Location: Georgia
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That last bit is key: Most of the attention and discussion about personal finance is focused at those who have more money to save/invest, i.e., older folks. Roth doesn't do much for older folks. It basically lets us tax our retirement savings at our current, rather high marginal rate, thereby taking away our ability to perhaps someday pay tax on that money at a lower marginal rate instead, in return for the possibility that the earnings on this money we save (which perhaps will be heavily invested in conservative investments, as we start trending our asset allocation to equities downward in preparation for retirement) may end up being enough to compensate for the additional tax we pay now plus the dividends we would have earned, between now and when we use the money, on the money we instead had to pay in tax.
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Old 02-12-2015, 08:40 AM
 
Location: WA
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Quote:
Originally Posted by mathjak107 View Post
roth 401k's are newer and didn't exist prior.

most humans like instant gratification so they want their tax deduction , although for many younger workers that could be a costly mistake.
Yes, the IRA became generally available in the early '80s and the Roth version not until the late 90's. Much of todays retirement savings could not be done in Roth accounts and conversion is a taxable event. 401K laws happened in about the same time frame.
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Old 02-12-2015, 09:20 AM
 
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Quote:
Originally Posted by AmFest View Post
In terms of tax advantage, a Roth 401(k) works like a Roth IRA and a traditional 401(k) works like a traditional IRA. So why the difference in contribution preference? What am I missing here?
I would surmise it's a combination of two factors - first, inertia, AKA tradition, and second, employers that offer good benefits such as a 401K are generally hiring full-time and in a good percentage of cases are paying enough to push the employees into at least the 25% tax bracket, in which case the pre-tax contribution makes more sense than for part-time workers and low-wage workers who are in lower brackets.

Possibly the traditional 401k is also motivated to some extent by being a substitute for a defined-benefit pension. In this case the pre-tax account preserves the tax treatment of a pension.
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Old 02-12-2015, 09:36 AM
 
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Personally, diversification.

I can put $5500 in an IRA and $17,500 in a 401(k). Making the 401(k) the "Traditional" of the two makes sense for me because I'm in the 28% bracket and likely to stay here for the rest of my career, but at the same time, once retirement comes it would be nice to have some "post-tax" money to withdraw to avoid raising my taxable income.

I could flip it around, except I'd rather skew towards more money going in pre-tax.

But the biggest aspect is simply the traditional ira contribution benefits phase out at a lower income level than the Roth contribution limit. For 2014, the tax deduction on a traditional phases out between 60-70k. For a Roth contribution, the contribution limit doesn't phase out until 114-129k.

Since the 401(k) contribution limit isn't affected like that, I can contribute the max as pre-tax to a 401(k) and the max to a Roth, but under the reverse, I would have phased out of the traditional IRA contribution.

So no one with a MAGI over 70k can have a Traditional IRA, making the roth the more popular one automatically for that income level.
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Old 02-12-2015, 09:48 AM
 
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Quote:
Originally Posted by Jeo123 View Post
Personally, diversification.

I can put $5500 in an IRA and $17,500 in a 401(k). Making the 401(k) the "Traditional" of the two makes sense for me because I'm in the 28% bracket and likely to stay here for the rest of my career, but at the same time, once retirement comes it would be nice to have some "post-tax" money to withdraw to avoid raising my taxable income.

I could flip it around, except I'd rather skew towards more money going in pre-tax.

But the biggest aspect is simply the traditional ira contribution benefits phase out at a lower income level than the Roth contribution limit. For 2014, the tax deduction on a traditional phases out between 60-70k. For a Roth contribution, the contribution limit doesn't phase out until 114-129k.

Since the 401(k) contribution limit isn't affected like that, I can contribute the max as pre-tax to a 401(k) and the max to a Roth, but under the reverse, I would have phased out of the traditional IRA contribution.

So no one with a MAGI over 70k can have a Traditional IRA, making the roth the more popular one automatically for that income level.
You're assuming the employee is single.
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Old 02-12-2015, 09:53 AM
 
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Quote:
Originally Posted by ncole1 View Post
You're assuming the employee is single.
For the sake of simplicity with my numbers yes, I only listed the Single phase outs.

If you really want:

Traditional phase out married: $96k-116k
Roth phase out married: $181k- 191k

Doesn't change anything about the rational behind one being more common and the only change to my post would be that instead of "no one" it would be "no couple."
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Old 02-12-2015, 11:56 AM
 
Location: Chapel Hill, NC, formerly DC and Phila
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I know that several years ago I read an article about it and something like 90% of companies at the time still only offered traditional 401ks; most didn't offer a Roth 401k. I don't know what the ratio is now, but my husband's company only offers a traditional 401k.
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