This brief overview by Ramit Sethi on iwillteachyoutoberich is great for getting the basic vocabulary down. After that, the most helpful article I found was on CNN Money, by Walter Updegrave. The Wikipedia entry on Roth 401(k)s also isn’t a bad resource.

I realized after reading all this that one should participate in both plans to “hedge your bets” — finance-speak for covering all your bases.  The real decisions are whether you’ll be putting more into one or the other and what your 401(k) allocations look like.  There’s usually too much un-funny funny in the Motley Fool for my taste, but their page on picking what goes into your 401(k) is very helpful.

Anyway, back to this Roth/traditional 401(k) business.

What Tax Brackets Have To Do With It

Updegrave shows that the tax savings are equal in the end if you stay in the same tax bracket, say, 25 percent. But if you expect to be in a higher tax bracket, say 33 percent, then why not get it taxed at 25 percent and withdraw tax-free when you’re old?  Furthermore, it’s not for certain that tax rates will increase in the future, but they probably will. We’ve all heard Obama say he’s increasing taxes for people who make more than 200,000, right? I’m not saying I will ever make more than that, but *just* in case…

You could you expect to be in a higher tax bracket if you are just starting your career and plan to be making a lot more money in the next forty years. You could expect to be in a lower tax bracket if you are already at the peak of your career and will be taking it down a notch in the next two decades or so.

How Much Can You Put In?

Then there’s the question if which one lets you put more money in from the get-go. max is 15,500 for both.

If Roth after-tax in 25 percent bracket, then you invest 15,500 pre-tax (which becomes 11,625) and even more (3,375 x 1.25 = 4,218.75) up to 15,500 to max it out. so you put more in from the start. If traditional 401k, then you max it out at 15,500 pre-tax and should invest the tax savings (4,218.75) in stocks. if your stocks do well then you end up with more!

For mid-career folks with a higher income, the Roth 401(k) is also pretty much the only way to take advantage of the after-tax feature of a Roth IRA. Before the Roth 401(k), you could only get a Roth IRA, which maxes out at $5,000 per year and is only available to people who make under $110,000 annually.

Final Notes

• If your company does offer a match, the match goes into a 401(k), not the Roth 401(k).
• You can roll the Roth 401(k) into a Roth IRA at any time, i.e., if you change employers, or to avoid making required withdrawals after age 70 or so.
• There’s a Social Security benefit to the Roth 401(k), which is that the money here isn’t going to be taxed as income in the future.

What I’m Going To Do

I’m going to start out by giving the Roth 401(k) a (much) weightier percentage of my contributions. Given that I will probably end up in a higher tax bracket in the future, it’s definitely the better investment for a young person.  Furthermore, the absence of a company match (aka free money) gives me less incentive to put money into the company’s 401(k) plan, especially in this market.

I found an article saying that the Roth 401(k) is set to expire in 2010, unless Congress still looks favorably upon it. Not sure where this is headed, but don’t feel like looking into it.  Bottom line: take advantage of it while it’s there.

After the first couple months of savings-ness, I might also open a Roth IRA. I haven’t found a single article that hasn’t advocated for it as an investing essential for young people. Money from a Roth IRA is more liquid than these 401(k)s, and can be taken out tax-free for new family things like college, a house or even your kids’ education.

I Lego NY

Between me and the sun there’s a lamp and a tree.  The lamp is classic. Tall, dark, handsome, and capped, but its light is a stiff green-white glare. Probably energy-efficient LED, so I can’t complain too much. The tree is great; it looks like a naked bush on stilts. Naked because it’s leafless — it’s January — and the ends of the upmost branches all meet at the same point and flare out like an overgrown menorah.

What I really want to tell you about, though, is the sky. It caught me off guard, and probably also the four or five other people around me who just pulled out their cameras and cell phones. I’ve never seen anything like it, but I guess it’s been a couple of months since I’ve looked up.

It’s the color. Not the fluffy neon part. I know you’ve seen a lot of hazy pink and blue sunsets with the cotton balls that ripple out from the horizon. I don’t mean that.

Tonight’s sky, somehow, is shadowing the foreground.

First, the pink clouds break just behind the lamplight behind them this neutral greenish hue. It’s the ugly kind of color that doesn’t belong in this sky. Second, I swear the cloud bank behind the tree exactly follows the slight S-curve of the tree branch just in front of it.

It’s wonderful and all too rare that a view like that can make four people pause in their day. The casual European tourist who pulled out a cell phone. The Asian girl next to me waiting for someone who just can’t stop pulling her camera back out every two minutes.  She must have taken 20 or 30 already. The lady to the front waiting for a meeting, who slipped her cell back in her pocket just as her colleague came. And me, looking up again.

It was the classic instance of urban aloneness, in which four strangers paused in parallel at the very same thing and then exited the scene without any outward acknowledgment that the others had shared in their moment of truth.

You don’t often get such an expansive view in New York City.  To I don’t even know what’s on the opposite shore — a handful of skyscrapers huddled across the southwestern tip of Manhattan, or Newark accepting the late overflow of the greater city.  There’s this Jersey trashy neon clock, red and yellow at the foot of the tallest building.  It’s probably bigger than my house.  After sunset the skyscraper lights turn on and the clock blends in, like a reminder to gamble away your Wall Street losses in Atlantic City (just a coupla hours away, and you might come back a winna!)  A huge diagonal beam cuts through my view, all part of the Winter Garden Spectacular, along with the fifty-foot palm trees behind me. Just past the building is a stone-dead stone plaza, one of those flawless expanses built exclusively to pass through…

Anyway, this is what I thought while I wondered what they were thinking.

Things You Can Do With a Can of Campbell’s Soup, by Brock Adams
– Barrelhouse Magazine