UPS Enrollment

Scenario 3: Sara

Earns $50,000 per year; age 40 and plans to retire at age 65.

She has a combined federal and state tax rate of 22% today, and expects to pay a similar rate in retirement.

Contributes 8% of her pay.

The chart below shows the potential after-tax value at Sara’s retirement after 25 years if she made pre-tax versus Roth 401(k) contributions, as well as total taxes paid.

In Sara’s case, even though she could pay less in total taxes saving with Roth 401(k) contributions, she chooses pre-tax contributions because the $880 difference in her annual pay she’s putting toward her son’s college fund. Also, while she thinks her tax rate may be the same, it could be less in retirement and the difference may be negligible.

	If Sara contributes pre-tax only	If Sara contributes Roth 401(k) only
Contributions to Sara’s account each year	$4,000	$4,000
Value of contributions after 25 years	$225,725	$225,725
Less taxes on distribution at retirement assuming 22% tax rate	$49,660	$0
Amount distributed after taxes	$176,066	$225,725
Sara’s take home pay each year based on his contributions and 22% tax rate	$35,880	$35,000
Income taxes paid over 25 years at 22% tax rate	$253,000	$275,000
Total Taxes Paid	$302,660	$275,000

For demonstrative purposes only and not representative of any investment. Assumes monthly contributions with a 6% of pay with a 6% rate of return compounded monthly. Does not account for any pay increases over time. Example should not be taken as tax or investment advice.

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