Roth vs Traditional 401(k)
A 401(k) contribution 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withdrawn.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 contributing on a pre-tax basis, where deposits 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subject to taxes when the money is withdrawn.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 2012 is $17,000. If you are age 50 or over, a
"catch-up" provision allows you to contribute even more to your
401(k). Employees age 50 or over can deposit an
additional $5,500 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.
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 you
expect your salary to be $115,000 or more in 2012 or was $115,000
or more in 2011, 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
S&P 500 for the ten years ending on December 31st, 2011 had an
annual compounded rate of return of 2.92%, including reinvestment
of dividends. From January 1970 through the end of 2011, the
average annual compounded rate of return for the S&P 500,
including reinvestment of dividends, was approximately 10.01%
(source: www.standardandpoors.com). Since 1970, the highest
12-month return was 61% (June 1982 through June 1983). The lowest
12-month return was -43% (March 2008 to March 2009). Savings
accounts at a bank may pay as little as 0.25% or less but carry
significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are
hypothetical and that future rates of return can't be predicted
with certainty and that investments that pay higher rates of return
are generally 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 sales charges and other fees that funds and/or investment
companies 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.
| 10% |
$0 - 17,400 |
$0 - 8,700 |
$0 - $12,400 |
$0 - 8,700 |
| 15% |
$17,400 - 70,700 |
$8,700 - 35,350 |
$12,400 - 47,350 |
$8,700 - 35,350 |
| 25% |
$70,700 - 142,700 |
$35,350 - 85,650 |
$47,350 - 122,300 |
$35,350 - 71,350 |
| 28% |
$142,700 - 217,450 |
$85,650 - 178,650 |
$122,300 - 198,050 |
$71,350 - 108,725 |
| 33% |
$217,450 - 388,350 |
$178,650 - 388,350 |
$198,050 - 388,350 |
$108,725 - 194,175 |
| 35% |
over $388,350 |
over $388,350 |
over $388,350 |
over $194,175 |
Source: Revenue Procedure 2011-52 http://www.irs.gov
- 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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