Which option is right for you? Pension Maxima Investment Advisory

Traditional versus Roth 401(k) TraditionalRoth Employee ContributionsPre-taxAfter-tax Contribution Limits$16,500 $22,000 if 50 or over. Additional criteria: Total Traditional and Roth contributions can not exceed Federal Limit of $16,500 or $22,000 if 50 or over. Same as Traditional. Company MatchPre-tax DistributionSubject to taxTax-free Distribution

Which one is more advantageous? Scenario (1): Tax rates at contribution and withdrawal are the same. Scenario (1), Same Tax RatesTraditionalRoth Tax Rate at Contribution20% Contribution$100$80 Growth (8%, 20 years)$100*1.08^2080*1.08^20 Distribution Tax Rate20% Final Account Balance$100*1.08^20*.8 or $80*1.08^20 ResultsIdentical

Which one is more advantageous? Scenario (2): Tax rate at contribution is greater than tax rate at distribution Scenario Two ( Contribution Tax Rate > Distribution Tax Rate) TraditionalRoth Employee Contribution100 Tax Rate at Contribution40% Growth (8%, 20 Years)$100*1.08^20$60*1.08^20 Distribution Tax Rate30% After tax balance$100*1.08^20*.7 or $70*1.08^20 $60*1.08^20 ResultsMore MoneyLess Money

Which one is more advantageous? Scenario (3): Tax rate at contribution is lower than tax rate at distribution Scenario Three ( Contribution Tax Rate < Distribution Tax Rate) TraditionalRoth Employee Contribution100 Tax Rate at Contribution30% Growth (8%, 20 Years)$100*1.08^20$70*1.08^20 Distribution Tax Rate40% After tax balance$100*1.08^20*.6 or $60*1.08^20 $70*1.08^20 ResultsLess MoneyMore Money

Application: Traditional or Roth? ScenariosTraditionalRoth 1. Expects future tax rate to be lower due to lower income at Retirement. More MoneyLess Money 2. Expects future tax rate to be higher due to change in government’s fiscal policy. Less MoneyMore Money 3. High Income Earners: Wants to maximize tax deferral capability Defer less moneyDefer more money since $15,500 (or $22,000 if over 50) is now calculated on an after tax basis 4. Young Participants: Expects tax rates to go up as earning power goes up Less MoneyMore Money 5. Avoid Required Minimum Distribution at 70 ½ NoYes. Maximize estate by paying taxes now. 6. Avoid Social Security TaxesNo, unless your income is below SS exempt level. Maximize Social Security payouts since Roth Distributions are not considered as SS income

Other Tax Considerations for Traditional 1.Moving money to Traditional can help drop a tax bracket. Example dropping from 25% to 15% can mean huge savings! 2.First $11,500 in earnings are normally tax free or taxed at a very low rate. You should always keep some money in Traditional for tax free or low tax withdrawal before you start distributing from Roth.

The End The information regarding investment contained herein is general in nature and should not be considered legal or tax advice. Pension Maxima Investment Advisory does not provide legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect this information. You should consult with your attorney or tax advisor regarding your specific legal or tax situation