Roth 401(k) or Traditional 401(k)?

A 401(k) can be an effective retirement tool.  As of January 2006, there is a new type of 401(k) - the Roth 401(k).  The Roth 401(k) allows you to contribute to your 401(k) account on an after-tax basis - and pay no taxes on qualifying distributions when the money is withdrawn.   For some investors, this could prove to be a better option than the Traditional 401(k), where deposits are made on a pre-tax basis but are subject to taxes when the money is withdrawn.  Use this calculator to help determine the best option for your retirement.

Definitions

Current age

Your current age.

Annual contribution

The amount you will contribute to a 401(k) each year. This calculator assumes that you make 12 equal contributions throughout the year at the beginning of each month.  The annual maximum for 2006 is $15,000. If you are over 50, a "catch-up" provision allows you to contribute even more to your 401(k). In 2006, employees over 50 can deposit an additional $5,000 into their 401(k) account. It is also important to note that employer contributions do not affect an employee's maximum annual contribution limit.  Both the annual maximum and "catch-up" provisions are indexed for inflation after 2006.

It is important to note that some employees are subject to another form of contribution limits. Employees classified as "Highly Compensated" may be subject to contribution limits based on their employer's overall 401(k) participation. If your salary for the previous plan year was above $95,000, you may need to contact your employer to see if these additional contribution limits apply to you.

Expected rate of return

The annual rate of return for your 401(k) account. This calculator assumes that your return is compounded annually and your deposits are made monthly.  The actual rate of return is largely dependant on the type of investments you select.  From January 1970 to December 2005, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.4% per year. During this period, the highest 12-month return was 61%, and the lowest was -39%.  Savings accounts at a bank pay as little as 1% or less.

It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.  It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect additional sales charges and fees that funds may charge.

Age of retirement

Age you wish to retire. This calculator assumes that the year you retire, you do not make any contributions to your 401(k). So if you retire at age 65, your last contribution happened when you were actually 64.

Current tax rate

The current marginal income tax rate you expect to pay on your taxable investments. Use the table below to assist you in determining your current tax rate.