UPS Enrollment

Scenario 4: Art

Earns $70,000 per year; age 60 and plans to retire at age 65.

He has a combined federal and state tax rate of 28% today, and expects to pay 22% in retirement.

Contributes 15% of his pay.

The chart below shows the potential after-tax value at Art’s retirement after 5 years if he made pre-tax versus Roth 401(k) contributions, as well as total taxes paid.

For Art, he may want to continue pre-tax saving. Not only will he pay less in overall taxes, he can take the close to $3,000 difference in his annual take-home pay after taxes and invest it outside of his 401(k) account. Alternatively, given that he already has a large pre-tax balance which he will need to pay taxes on, he may want to start saving with Roth 401(k) contributions, giving him a tax-free income source in retirement, helping to lower his overall taxes.

	If Art contributes pre-tax only	If Art contributes Roth 401(k) only
Contributions to Art’s account each year	$10,500	$10,500
Value of contributions after 5 years	$60,880	$60,880
Less taxes on distribution at retirement assuming 22% tax rate	$13,934	$0
Amount distributed after taxes	$47,486	$60,880
Art’s take home pay each year based on his contributions and 28% tax rate	$42,840	$39,000
Income taxes paid over 5 years at 28% tax rate	$83,300	$98,000
Total Taxes Paid	$96,694	$98,000

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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