The Roth 401(k) Estimator

Updated on September 18, 2008. 

DOES YOUR employer offer a Roth 401(k) plan?

This retirement savings option, which first became available on January 1, 2006, combines features of both a traditional 401(k) plan and a Roth IRA. Like a Roth IRA, contributions are made on a post-tax basis and qualified withdrawals taken during retirement are completely tax free. (With a traditional 401(k), contributions are pretax and withdrawals taken during retirement are taxed as ordinary income.) And like a traditional 401(k), the Roth 401(k) has no income restrictions — if your employer offers it, you're eligible. (For more details, read our story, "Introducing the Roth 401(k).")

So far only 14% of employers have added the Roth 401(k) to their benefits menu and another 11% are expected to implement it by the end of the year, according to Hewitt Associates, a human resources outsourcing and consulting firm. 

By all accounts, the Roth 401(k) is a great way to save for retirement. But it does come with a catch: For those who have traditionally saved on a pretax basis, switching to after-tax contributions could spell a bigger annual tax bill during the year contributions are made. It will also mean that you'll have a slightly smaller take-home paycheck — assuming you don't adjust your contribution amount.

Consider this example: An employee with a $70,000 annual income will get a biweekly $1,745 take-home paycheck, assuming he or she contributes 10% to a traditional 401(k) and is in the 28% tax bracket. With a Roth 401(k), the paychecks shrink to $1,669. That's roughly $150 less each month — or an extra $1,800 a year going to the IRS. The benefit, however, is that during retirement, this employee won't owe any taxes on withdrawals.

For many folks, choosing between a Roth and a traditional 401(k) comes down to doing the math: Which 401(k) option will allow them to amass a bigger nest egg over the long run?

To help give you a general idea, we've developed an estimator that lets you compare the after-tax amount of your retirement savings in two scenarios: contributing to a traditional 401(k) or to a Roth 401(k). (You can also choose to make contributions to both options at the same time. Remember not to exceed the contribution limit, which is $15,500 in 2008, and applies to both plans taken together, not including the company match.) Under each scenario, the worksheet will estimate your take-home pay as well as the size of your nest egg during retirement.

Since you'll always have a slightly larger take-home paycheck when contributing to a traditional 401(k) than you would with the Roth 401(k), we also give you the option of investing that difference. Why? Because while a Roth 401(k) typically allows investors to amass a bigger balance over the years (provided their tax rate in retirement is the same or higher than their current one), the traditional 401(k) provides savings that don't just evaporate. It's money you may save, invest, or simply consume.

Ultimately, whether an individual is better off with a Roth 401(k) than with a traditional 401(k) depends on whether their income taxes will be higher in retirement than they are now, says Chris Bowman, vice president of retirement and investor services at Principal Financial Group, a Des Moines, Iowa-based 401(k) plan provider. Unfortunately, that's something no one can predict with certainty. So give it your best shot.

A few tips on the worksheet itself: