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Roth 401(k) Analyzersm

Annuity Sample Report and Report Description

View: Sample Annuity Report   Supplemental Information Report

View Article: Roth 401(k): Significant Retirement and Estate Planning Opportunities for Business Owners/HCEs

Choose this report to see how changes in your future Marginal Tax Rate (MTR) impact retirement benefits.  Your MTR is the rate of tax you pay on the last dollars you earn.  This is a important factor in decisions involving taxation of contributions to (and distributions from) retirement or other savings accounts.  Learn more

The Annuity Report is preferred for individuals who:

  • Plan to postpone distributions from retirement accounts until they reach age 71 (the required beginning date for minimum distributions from pre-tax accounts for most individuals)
  • Do not necessarily plan to leave assets to beneficiaries
  • Anticipate a modest decrease (e.g., 7%), no change or an increase in their MTR during retirement
  • Maximum savers

The Annuity Report assists you in determining which 401(k) option, pre-tax or Roth, provides a more favorable outcome during retirement by graphically illustrating distribution outcomes from 3 different retirement accounts:

  • Pre-tax 401(k) account
  • Pre-tax 401(k) account combined with an after-tax savings account
  • Roth 401(k) account.

Contribution and Distribution Assumptions  The report provides a comparison of the distribution outcomes from each of these accounts based on the number of years you select to contribute to each option assuming that distributions begin from all accounts at age 71 (the age at which minimum distributions from pre-tax 401(k) or IRA account must begin for most individuals) and continue in equal annual payments through age 85.  Distributions from each of these accounts are compared assuming:

  • A decrease in your MTR during retirement
  • No change in your MTR during retirement
  • An increase in your MTR during retirement

The Annuity Report allows you to specify:

  • Name
  • Date of Birth
  • Gender
  • Compensation
  • Amount you contribute currently to a pre-tax 401(k) account (for comparison to Roth 401(k) contribution)
  • Decrease and increase in tax rate during retirement
  • Number of years you wish to contribute
  • Year in which you first start contributions for comparison purposes
  • Portfolio (percentage of stocks and bonds) and Investment Assumptions (rates of return)

The Annuity Report provides two graphic illustrations along with tables that display contributions to each respective account, account investment growth and distributions during retirement.

Graph #1 "Same Net Pay Means Lower Roth Contribution"  Your selected pre-tax contribution amount is compared to an after-tax Roth contribution that is based on the same salary reduction yielding the same net pay; therefore, your after-tax Roth contribution is lower.

The results indicate that if your MTR does not change between now and your retirement, your total after-tax distributions following retirement are the same under both the Roth and pre-tax options.  If your MTR decreases, the pre-tax option is preferable; if your MTR increases, the Roth option is preferable.

Graph #2 "Same Roth Contribution Means Higher Salary Reduction"  Your selected pre-tax contribution amount is compared to the same dollar amount contributed to the Roth on an after-tax basis; therefore, your salary reduction is higher.

This graph also illustrates the outcome of investing in an after-tax savings account (a “side fund”). The side fund represents the after-tax savings dollars available for personal investment if you contributed to the pre-tax option instead of the Roth option.

For example, if you contribute $1,000 to the after-tax Roth account and your MTR is 25%, you must reduce your pay by $1,333. You pay $333 in tax to contribute $1,000 to the plan.  Since it only cost $1,000 to contribute the same amount to the pre-tax option, your net pay before taxes is $333 higher. You pay $83 in tax and receive $250 more in your net paycheck.

Side Fund  The contribution to the side fund is the after-tax difference between the higher $1,333 salary reduction required for the Roth and $1,000 salary reduction required for the pre-tax.

Formula: Side Fund = ($1,333 -$1,000) (1-25%)

Result: Side Fund = $250

Graph #2 illustrates the distribution outcome of the higher salary reduction if you contribute the same dollar amount to the Roth as you would have to the pre-tax option. This analysis considers the outcome of the Roth contributions compared to the outcome for both the pre-tax contributions and the side fund combined.  In most instances, the results indicate that the Roth option provides a higher total after-tax accumulation even when your tax rate decreases during retirement.  This outcome is not anticipated since typically if your tax rate decreases following retirement, the pre-tax option yields the higher total after-tax accumulation. If your MTR stays the same or increases, the Roth provides significantly higher benefits following retirement.

Reason for Graph #2 Unanticipated Outcome  The Roth option provides the ability to invest in various asset classes within the tax-free environment.  Assuming comparable risk factors on the selected investments, it is virtually impossible for a taxable side fund to perform as well as the tax-free Roth.  For example, compare investing in a tax free bond earning 4% to taxable bond in Roth 401(k) account earning 5.5%, or a stock taxed at 15% versus income tax free in the Roth 401(k) account.

Keep in mind, graph #2 does not consider contributing a higher amount to the pre-tax option.  Therefore, unless you are contributing the maximum allowable contribution to the pre-tax account ($16,500 plus $5,500 if age 50 or older), or your contribution is limited by your income or the 401(k) nondiscrimination test, the results shown in graph #2 may not be pertinent to your situation.

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