PUB 590, page 2

http://www.irs.gov/pub/irs-pdf/p590.pdf

If you are REALLY interested, start digging into Chapters 1 and two

 

Everyone has access to a Roth nowadays with the new tax law conversion limits, even high earners, even if you do not have access to a Roth 401k at work. So if you prefer to contribute to a Roth, you and your spouse can dump in 10 grand per year. If you and/or the spouse are 50 or older, you can put an extra grand in for each of you that meet that age requirement. So that's 12 grand for when you get older. Since most people don't even save that much for retirement anyway (yes I realize YOU do but most don't) not having a Roth at work is a moot point.

There was some discussion earlier in the thread about whether to contribute to a deductible vehicle (401k for example) or a Roth. Consider this scenario:

Pilot A is in the 25% tax bracket and plans on being a good saver and anticipates being in the 25% tax bracket when he retires.
Pilot B is in the 25% tax bracket and plans on being a good saver and anticipates being in the 25% tax bracket when he retires as well.

Both pilots have 10K in pretax dollars to contribute to their retirement plan in year 1 and make no further contributions (to keep things simple). Both pilots earn 10% annualized on their investments every year. Pilot A invests entirely in a deductible 401K. Pilot B invests entirely in a Roth 401k. After X years, they retire and cash out their 401k's to buy a boat to attract a hot, young twinkie (both pilots divorced in this example). Who will be able to buy the bigger boat and therefore get the hottest trophy wife? The answer may be surprising. It goes to show that it is difficult to determine which investment vehicle is best without a crystal ball or the benefit of hindsight.

Let's say X is 10 years in this example.

Pilot A puts in the full 10K in his deductible 401K because no taxes are deducted. After 10 years he has $23579.84.

Pilot B puts in only $7500 into his Roth because taxes come out first ($10K * (1-.25))= $7500. After 10 years he "only" has $17684.61. Pilot A wins, right?

Nope. They both are cashing out to buy that boat. Uncle Sugar has to be paid by Pilot A. Pilot B owes nothing more in taxes.

Pilot A will owe 25% on that 23K+ balance. ($23579.48 * (1-.25))= $17684.61

So who gets the bigger boat? Neither! They both end up with the same exact after tax balance no matter what value is assigned to X. Fortunately for them both, the hottest trim in town are twins, they all live in rural Arkansas so a boat only worth 17K is impressive to these hot young women, and they both live happily ever after. The End.

I guess the point is that unless you know what tax bracket you're going to be in the future compared to now (crystal ball anyone? Will taxes 10 or 20 or 30 years from now be higher or lower for you?), the decision between Roth and deductible plan can get a bit fuzzy.

 

It's too early to verify your logic and math, but your humor sure got me!

2 funny!

Goose17

 

When can new hires contribute to the 401k? Just curious...didn't see any info about it and a buddy of mine at FDX thinks one can't do it for the first year.

 

Go to the FEDEX pilot web site. Look under the Contract Administration tab. You will find the tab for Pilot Benefit Book. Then look under Retirement. It will list the requirement for each plan.

 

Hawkeye,
I don't think he works for us yet - so that's not going to work for him.

I'm pretty sure you can start making contributions to the 401K after 6 months of employment.

Enrollment in the B-fund and the 7% company contributions start after 1 year (unless you have significant time off like Mil leave or something else).

 

Pilot Benefit Book
Retirement: Pilots’ Retirement Savings Plan (PRSP): Eligibility for Plan Participation

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Eligibility for Pre-tax/401(k), After-tax, and if Eligible, Catch-up and Rollover Contributions -- If you are employed by FedEx Express, you can begin making Pre-tax/401(k) contributions, After-tax contributions, and if eligible, Catch-up contributions and Rollover contributions on your Plan Entry Date. Your Entry Date is the first day of the month coincident with or next following:

Your attainment of age 21; and
Your completion of 6 months of employment with FedEx Express or another Controlled Group Member. (For a list of Controlled Group Members, see "Scope and Guidelines")
Eligibility for Employer Matching and Employer Sick Bank Contributions -- If you are employed by FedEx Express, you are eligible to receive Employer Sick Bank Contributions and Employer Matching contributions on your Pre-tax/401(k) contributions on the first day of the month coincident with or next following:

Your attainment of age 21; and
The first anniversary date of your employment if you are credited with at least 1,000 hours of service during your first year of employment. If you do not complete 1,000 hours of service during your first employment year, you may do so during any Plan Year starting with the first Plan Year beginning after your date of hire; you are eligible to receive Employer Matching and Employer Sick Bank contributions on January 1 next following the Plan Year during which you were credited with at least 1,000 hours of service.
Hours of Service -- Hours of service include each hour that you are paid or entitled to pay by FedEx Express, including time off for vacation, holidays, medical absences, jury duty or military duty as required by law.

Hours associated with non-taxable amounts paid from a Pilot's Occupational Illness/Injury Sick Bank shall be counted as hours of service for eligibility, vesting and benefit accrual.

This does not include hours you are paid or entitled to pay just to comply with:

Unemployment compensation laws,
Disability insurance laws,
Payment made for medical expense reimbursement,
Service during hours of family medical leaves (except for the first 501 hours, which may be used to prevent a one-year break in service).
Hours credited by the Payroll Department are used in determining credited service while actively at work. The Payroll Department credits active pilots with 95 hours per pay period.

Pilots receive credited service for periods of disability which are calculated as follows:

Days of Leave ÷ 7 Days x 45 Hours = Total Credited Hours per Leave

If you are an individual who, on or after June 1, 1992, first becomes eligible for a disability benefit under the terms of the Federal Express Corporation Short Term Disability Plan or the Federal Express Corporation Long Term Disability Plan (as such plans may exist from time to time) or who becomes entitled to receive Workers' Compensation benefits, hours of service shall be credited to you as if your hours of service had been continually credited during the period of such benefit entitlement up to your normal retirement age, or if greater, and to the extent required by law, for the period for which you qualify for such benefits.

 

Pilot Benefit Book
Retirement: Pilots’ Money Purchase Pension Plan (PMPPP): Eligibility

--------------------------------------------------------------------------------
If you were a pilot on May 30, 1999, you automatically became a plan participant on June 1, 1999. Otherwise, you automatically become a plan participant on the first day of the month coincident with or next following:

Your attainment of age 21; and
The first anniversary date of your employment with a Controlled Group Member, if you were credited with at least 1,000 hours of service during your first year of employment. See listing of Controlled Group Members and "Hours of Service," below. If you do not complete 1,000 hours of service during your first employment year, you may do so during any plan year starting with the first plan year beginning after your date of hire. You enter the Plan on the first day of the month coincident with or next following fulfillment of the required 1,000 hours of service.
If you are classified by FedEx Express as an independent contractor or leased employee, you are not eligible to participate in any benefit plans sponsored by FedEx Express, even if such person is later determined by a court or administrative agency having competent jurisdiction to be a common law employee of the employer.

Hours of Service -- Hours of service include each hour that you are paid or entitled to pay by FedEx Express, including time off for vacation, holidays, paid medical absences, jury duty or military duty as required by law.

Hours associated with non-taxable amounts paid from a Pilot's Occupational Illness/Injury Sick Bank shall be counted as hours of service for eligibility, vesting and benefit accrual.

This does not include hours you are paid or entitled to pay just to comply with:

Unemployment compensation laws,
Workers' Compensation laws*
Disability insurance laws
Payment made for medical expense reimbursement or
Service during hours of family medical leaves (except the first 501 hours are used to prevent a one-year break in service).
Hours credited by the Payroll Department are used in determining credited service while actively at work. The Payroll Department credits active pilots with 95 hours per pay periods.

Pilots receive credited service for periods of disability* which are calculated as follows:

Days of Leave ÷ 7 Days x 45 Hours = Total Credited Hours per Leave

*If you are an individual who, on or after June 1, 1992, first becomes eligible for a disability benefit under the terms of the Federal Express Corporation Long Term Disability Plan or the Federal Express Corporation Short Term Disability Plan (as such plans may exist from time to time) or who becomes entitled to receive Workers' Compensation benefits, hours of service shall be credited to you as if your hours of service had been continuously credited during the period of such benefit entitlement up to your normal retirement age, or if greater, and to the extent required by law, for the period for which you qualify for such benefits.

 

...and that's why the benefits JetJok pointed out (...no mandatory withdrawls at Age 70 1/2 and the ability to pass the account on to your heirs at a stepped-up tax basis) make the Roth a better deal, when the tax rates, time horizon, and rate of returns may make two options very similar / fuzzy.

 

Thanks for the info guys!