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]
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!
[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.