Is the Roth 401(k) Right for You?
In January 2006, some companies will begin to offer the new Roth 401(k) retirement plan to employees. The plan is a combination of the traditional 401(k) and the Roth IRA and has many attractive features, but is it right for you?
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What is the Roth 401(k)?
A Roth 401(k) is a work-related retirement plan that will allow you to contribute up to $15,000 ($20,000 if you are over 50) of unmatched post-tax income. Upon retirement, withdrawals are not subject to further taxation. In contrast, a traditional 401(k) has the same contribution levels, but contributions are made with pretax dollars and are often matched by your employer.
Who can benefit by contributions to a Roth 401(k)?
If you are already well-prepared for retirement and are setting significant funds aside for the future, investing in a Roth 401(k) will ensure that you are not bumped into a higher tax bracket in retirement because withdrawals from a Roth 401(k) are not considered income.
If you are currently in a low tax bracket, invest in a Roth 401(k). This way, if taxes increase in the future, you will be gaining a significant tax break by paying taxes on your income now.
If you are already contributing the maximum allowable to your 401(k), begin to contribute to a Roth 401(k) instead. Higher-income workers will not have a difficult time contributing post-tax earnings at a significant rate.
Additionally, if you are a higher-income worker who earns too much to open a traditional Roth IRA but who wants the benefits afforded by a Roth IRA, you are qualified to contribute to a Roth 401(k) and reap the same benefits. (If you are married and earn $140,000 combined, or if you are single and earn $110,000, you cannot contribute to a traditional Roth IRA.)
Who should not contribute to a Roth 401(k)?
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
If you are currently contributing small amounts of your income, or no income at all, toward retirement, then a Roth 401(k) is not for you.
In addition, if you are a commissioned salesperson and are earning an unusually high income that is not likely to last, then you will probably find yourself in a higher tax bracket now than you will in retirement. It will be better for you to take your tax break now than later, so a traditional 401(k) would be a better option.