The A-Team talks about the Roth 401k vs. Traditional 401k’s

A-Team discusses Traditional vs. Roth 401k

26 comments

in Retirement

That’s right fools, the A-Team is not just about rescuing your biker infested small town, they’re here to help you with your retirement planning. So light your cigar, pull out your welding cart and lock and load we’re talking about 401k’s.

[The scene opens on a deserted small town with some thug like biker's hassling a little boy as he walks to the general store]
Store Clerk: Yeah Fred that’s right what would my effective tax rate be? I just don’t know….hold on a minute those bikers are hassling Timmy. Hey! Leave him alone.
Bike Thug 1: Who’s going to stop me, you? [Throw's a Molotav cocktail at general store and erupts in flames]
Store Clerk: Fred, run for help who can help save our town and give us some sound retirement planning advice?

[A-Team Van comes flying down the dirt road into town in a 4 wheel drift right in front of the Tavern, All jump out and a cacophony of gunfire ensues from all 4 team members as they hit absolutely nothing]

ateam-van

Hannibal: You pigs better get out of here before we drop you like my tax bracket next year when I retire!
Bike Thug 2: I don’t even know what that means, you won’t get away with this!

[Thugs get on their choppers and take off out of town]

Fred: Boy you guys showed up just at the right time, those bikers have been given us trouble for weeks, a lot like the taxes I keep having to pay on my stock dividends, I just wish we could keep this town safe and put some retirement money away tax free.
Hannibal:
Looks like you boys just hired yourselves the A-team, we’ll get you your town back and help you build your nest eggs.
Murdoch: Colonel, you know I don’t eat eggs anymore after that incident with Bo-bo.
Hannibal: I know captain, why don’t you head up to the rock quarry there and see if you can rustle up a chopper.
Murdoch: You got it Hannibal, it’s what Bo-bo would have wanted. Do you think a Roth 401k would be right for their retirement?
BA: Cut the jibba jabba sucka we’ve got work to do!
Face: You know B.A. Murdoch may actually be on to something.
Hannibal: Face why don’t you run down some options for the town folk why B.A. and I prepare some defenses with this canned, food, a wood chipper and some pvc pipe.

[B.A. lights his acetylene torch and begins welding some plate metal to the van]

Face Breaks Down the Roth 401k vs. the Traditional 401k

Face: You see it’s pretty simple.  The government is actually willing to help you save money for your retirement but you have to make some choices depending on what you think your tax situation will be. If you know that you are going to be paying less taxes (have less taxable income) at the time you retire then it may be to your advantage to just invest in a traditional 401k.  The money that you put into your retirement plan is tax deferred meaning that you don’t pay any taxes on that income it’s just thrown into your 401k account, but you’ll pay whatever your tax rate is when you pull out your money at retirement.  A lot of people think they are going to be paying less taxes when they retire but they forgot that they may be being much less tax right now because of tax deductions like dependent children, mortgages, giving and the like.  Hopefully when you retire, Jr. has moved out, and you’ve paid off your home so you won’t be able to claim those tax rates.
Store Clerk: That sounds like me I’m 37, have 2 kids and a mortgage, how do I know what my current tax rate is and what should I do?
Face: Your effective tax rate can easily be determined by looking at last years tax return.  If you use something like Turbo Tax it will calculate it for you.  Even though you may be in the 25% tax bracket you will pay much less than that when you deduct your kids and your mortgage interest.  To get your tax rate take your Total Tax payments (Box 61 on your 1040) and divide by your Adjusted Gross Income (Box 37 on your 1040) and multiply by 100 to get your effective tax rate.  Now compare that to what you may be paying when you start pulling money out of your retirement when you won’t have so many deductions.  You’re a great candidate for a Roth 401k if your employer offers it.
Store Clerk: How is it different?
Face: the money you put into your Roth 401k will be after taxes.  The government is going to take it’s share on your income then you invest it in your Roth 401k.  But the best part is that it will grow free and clear of the government and at age 59 1/2 you can pull it out without paying any taxes.  It’s a thing of beauty.
Murdoch: [radios in to Face] I hate to break up your financial chat there Suze Orman but we’ve got some P.O’d bikers rolling into town and they don’t look like they want to join your investing club.
Face: Hannibal!  The bikers are back it’s time to do something.
Hannibal: Stand down Lt., hit it B.A.

[Bikers roll into town, sporting various weapons, shotguns, chains and knives.  B.A. opens the door to the barn to reveal their makeshift canned food cannon mounted on top of the van. ]

Hannibal: Lunch is served you scum!

ateam-ba[cans of corn, beans, and salmon are shot out of the cannon knocking the bikers to the ground where they groggigly stumble away.  Some bikers get in close to B.A. and he throws them repeatedly over his head into a great pile of bikers.]

Store Keeper: I don’t know how to thank you guys.
Hannibal: You can thank us by starting your 401k contributions today and taking advantage of the tax free growth of your Roth 401k.  Just remember if your company matches any of your contributions they’ll be put in a separate traditional 401k and will be taxable at the time of withdrawal.  If you want some more information you can try out this calculator to see which makes more sense.

[Sirens heard in the distance, and a caravan of military cars are seen speeding down the highway]

B.A.: Hannibal we gotta go, Decker’s coming!
Face: Remember to read your companies 401k information sheets for more information!

[A-Team speeds off just in the nick of time.]

Roth 401k in Closing

In all seriousness if you have the option to contribute to a Roth 401k at your employer it’s a great option for protecting your investments without worrying about future tax implications. The contribution limits are the same for the traditional and the Roth 401k which really means that you can invest more in the Roth because that money has already been taxed. So if you contributed the maximum amount for 2009 which is $16,500 in a traditional 401k that would be $16,500 minus your tax rate at time of withdrawal. With a Roth 401k that’s the full $16,500. It’s definitely worth your time researching if your company offers this tax advantaged plan.

Be Sociable, Share!

{ 4 trackbacks }

One Month Anniversary; The Weekend Hustle | The Zen Capitalist
2009/11/07 at 7:30 am
Carnival of Personal Finance #230 – New Site Edition - Canadian Finance Blog
2009/11/09 at 2:06 am
Top 135+ Personal Finance Posts for 2009 (That can be used 2010 and beyond)
2009/12/28 at 9:33 am
Top 135+ Personal Finance Posts for 2009 (That can be used 2010 and beyond) | Finance Blog
2010/01/05 at 10:38 am

{ 22 comments… read them below or add one }

Jeff Rose 2009/11/03 at 6:29 am

Haha! I love the A-Team! Great post. It was hard to really learn anything though because I was laughing the whole time :)

Reply

Jeff 2009/11/03 at 6:43 am

OMG, my co-workers are looking at me wondering what the hell I’m laughing about. Great way to talk about this topic. I hope it will be on youtube shortly. Maybe you can use Battleship Galatica or Star Wars to talk about Blasting away debt.
.-= Jeff´s last blog ..Emergency Fund Help Needed =-.

Reply

paul 2009/11/03 at 8:32 am

Thanks Jeff, those are some good ideas, honestly I had so much fun writing that one I think this is the first of a series.

Reply

Peter 2009/11/03 at 6:51 am

Great post.. definitely put a smile on my face. Nominated for one of my favorites of the year! The A-team on retirement accounts!
.-= Peter´s last blog ..Wealth And Contentment: Two Peas In A Pod =-.

Reply

paul 2009/11/03 at 8:32 am

Thanks Pete!

Reply

Evolution Of Wealth 2009/11/03 at 7:01 am

It’s too bad they aren’t making new episodes of the A-team. You could have sent it in. I didn’t know you wrote tv show episodes in your spare time? Great post. Luckily channel 20 on my Comcast cable (WMPF) still plays A-team episodes right after Knight Rider every night.
.-= Evolution Of Wealth´s last blog ..DIY Scare =-.

Reply

paul 2009/11/03 at 8:32 am

If you go to Hulu they have all the episodes on there, I had to watch a couple for inspiration.

Reply

PT 2009/11/03 at 7:34 am

Awesome. “jibba jabba!”
.-= PT´s last blog ..PocketSmith: A Calendar-Based Financial Planner =-.

Reply

Kyle 2009/11/03 at 8:00 am

Great post, I am now officially reminiscing. For all you die hard A-Team fans there is a full length feature in the works coming out in 2010 with Liam Neeson as Hannibal. Soon they are going to run out of my childhood TV shows, then what will they do for new movies.
.-= Kyle´s last blog ..Base Salary Isn’t Everything =-.

Reply

paul 2009/11/03 at 8:33 am

I’m sad to say that I’ve been monitoring it closely but how can you ever have someone else play B.A.?

Reply

FFB 2009/11/03 at 8:36 am

I pity the fool who don’t contribute to a 401k!

Whatchoo you doin’ with that needle?!? I ain’t goin on no plane with that crazy Murdoch flyin’!!

Reply

JoeTaxpayer 2009/11/03 at 9:32 am

Paul -
I know I’m going to get a reputation for being Anti-Roth, but I think a good look is important.
Since at retirement, one still has their exemptions and a standard deduction, the amount you’d need to have in pre-tax savings multiplies up pretty fast. Today, it would take $500K in that pre-tax account and one would still be in the zero bracket, no tax due. The next $400K or so to generate income at 10%. (Note, I’m assuming a 4%/yr withdrawal, so $1 in desired income at retirement requires $25 in saved money.)
My biggest fear surrounding Roth Mania is that people retire to find they paid tax at 25% or 28%, only to find they would now pay zero, but have little in pretax accounts to take advantage of that.
Consider it this way – savings into the pretax accounts, 401(k) IRA, 403(b) etc, all come out at your marginal rate by definition. Withdrawals start at your lowest rate which with no other income at retirement, can be zero.

Reply

paul 2009/11/03 at 10:58 am

Joe Anti-Roth Taxpayer,

I see this as a debate for the ages, also stemming largely on what the tax rates might actually be when you retire. I personally love the idea that what I’ve got in there can’t be further pilferred, but also I’m pessimistic enough to think that the Roth 401k might not be around for ever. So for my financial plan I’m covering both. Also I certainly plan to have enough in retirement that I’m well above the lower brackets.

Reply

JoeTaxpayer 2009/11/03 at 2:28 pm

That’s great. And since your audience, along with our fellow PF bloggers are not typical, this advice is more likely to impact them than the average person. For retirees today, however, it’s less than 10% who would have benefited, if that many.
Fun post though, and always good to plan in advance.
Joe
.-= JoeTaxpayer´s last blog ..Scanning into Evernote =-.

Reply

Blake 2009/11/03 at 2:48 pm

I feel like kind of a doofus for never seeing the A-Team outside of the Family Guy skit where comedy ensues after Peter, Joe, Cleveland, and Quagmire form a team of their own.

Kudos on the creativity! :D
.-= Blake´s last blog ..Bertrand Russell Financial Advice =-.

Reply

paul 2009/11/03 at 4:52 pm

Blake, stop whatever you are doing go over to hulu and watch season 1 of the A-team. This is a moral imperative.

Reply

GE Miller 2009/11/03 at 4:11 pm

What is it with personal finance bloggers being A-Team fanatics? I named two of my pets after A-Team characters. Love the post – dead on with the cliches.
.-= GE Miller´s last blog ..First-Time Homebuyer Tax Credit Extended AND Expanded into 2010 =-.

Reply

paul 2009/11/03 at 4:53 pm

Nice BA! I don’t know, seems that GI Joe was popular too, birds of a feather I guess.

Reply

The Casual Observer 2009/11/03 at 7:28 pm

Many months ago, I laid out several scenarios, although my article wasn’t as entertaining as yours:

http://www.observingcasually.com/roth-vs-401k/
.-= The Casual Observer´s last blog ..Member Exclusive: The Cell Window =-.

Reply

Mr. Not the Jet Set 2009/11/05 at 7:23 am

I love it when a retirement plan comes together.

very well done
.-= Mr. Not the Jet Set ´s last blog ..Health Insurance: Open Enrollement Time =-.

Reply

Download The A-Team Movie 2010/07/07 at 10:22 am

The A-Team 2010 is such a awesome movie I absolutely adored it so much! There’s no doubt that you may acknowledge the film is much more pleasurable compared to the original telly show

Reply

Functional Fitness - FuncThat 2010/10/12 at 10:59 am

Stumbled on this post while googling for an A-Team pic. Hilarious! (and a reminder to get rolling on my retirement planning).

Good Stuff!

Reply

Leave a Comment

Previous post:

Next post: