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

Posted by pf in Expenses and Savings.
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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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