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Traditional or Roth 401(k)? November 10, 2007

Posted by pf in Expenses and Savings.

This topic just won’t seem to go away for me.  You may recall my posts sometime ago where my company had introduced the Roth 401(k) and I could not decide how to take advantage of it:  Update: Traditional 401(k), Roth IRA, Roth 401(k) – Oh My!

At the time, I decided I would essentially do nothing.  Recently, I had a change of heart and decided to go ahead and totally reverse myself and contribute to my Roth 401(k) to the allowable limit and forego pre-tax investments altogether.  My rationale was:

  • Taxes have only one way to go from today – up.
  • I am not very well diversified in my retirement funds from a tax standpoint (almost all traditional 401(k)
  • The allure of not paying taxes in the future is strong

Well, it finally showed up in my check…and didn’t feel so great.  The additional tax bite comes to about $400 / month in take home pay.  OUCH.  While I understand I’m going for the “short term pain for long term gain”, I’m just not sure I have enough conviction to allow $400 / month in current income to float out the window.   The fact my wife was not very happy about it did not “stiffen my spine”, either.

So, I have gone ahead and reversed course again and am putting it all back the way it was…for now, while I give it some more thought.  In the meantime, my goals are to:

  • Fund my traditional 401(k) to the allowable limit ($15,500)
  • Fund a traditional Roth IRA to the allowable limit ($5K for each of us in 2008)

In the past, I have never been able to do both because it’s just a ton of money.  However, if my income for 2008 is similar to 2007, then I should be able to manage (all else being equal).   I feel a little bit better in that the Roth IRA contribution limits go up by $1000 from 2007, so it gives me the opportunity to save more on that basis without sacrificing any of the advantages of pre-tax savings.

I’m still unsure what the optimal answer is here, but figure I still have the opportunity to convert in 2010 if I change my mind again.



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