Roth vs. Traditional 401(k) Worksheet - Morningstar, Inc.

Roth vs. Traditional 401(k) Worksheet

PREPARED FOR:

DATE:

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An increasing number of 401(k) plans are offering a Roth option. The key differences are as follows: Traditional 401(k) p Pretax contributions

p Tax-deferred compounding

p Taxed upon withdrawal in retirement

DETERMINE TRADITIONAL VS. ROTH 401(K)

Are you just starting out in a career in a lucrative field? Have you recently completed a course of study that is apt to boost your earnings potential? Do you take a lot of tax credits and deductions? Is your income apt to be higher or lower in retirement than it is now?

Traditional 401(k) No No Yes Lower

Roth 401(k) Yes Yes Yes Higher

Roth 401(k) p After-tax contributions

Do you already have a lot of assets in a traditional IRA and/or 401(k)?

No

Yes

p Tax-free compounding

Are you maxing out your 401(k) contributions?

No

Yes

p Tax-free withdrawals

Will you be able to fund your retirement without your 401(k) assets?

No

Yes

You'll Need: p Company retirement plan's

Does your income level disqualify you from contributing to a Roth IRA?

No

Yes

Summary Plan Description or employee handbook

RESULTS

p Most recent tax return

p If most of your answers fell under the Traditional 401(k) column, that's likely the better option for you.

p Current 401(k) balance, as well as balances in other retirement accounts such as IRAs

p If most of your answers fell under the Roth 401(k) column, you're a good candidate for Roth 401(k) contributions. p If your answers were evenly divided among the two columns, consider splitting your contributions between the two vehicles.

TO CONTRIBUTE THE MAXIMUM ALLOWABLE AMOUNT:

p Traditional 401(k): Divide the maximum allowable 401(k) contribution by your annual salary to arrive at percentage.

p Roth 401(k): Multiply the maximum allowable amount by 1 plus your tax rate (for example, 1.24 if you're in the 24% tax bracket). Then divide that amount by your total salary to arrive at your desired percentage contribution per check.

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