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| The Roth 401(k) Contribution: Roth Redux |
| A relative newcomer to the retirement space, the Roth 401(k) combines some of the advantages of a Roth IRA with traditional 401(k) plans. |
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| Basically, the Roth 401(k), which was introduced in 2006, allows you to fund your retirement plan with after-tax dollars. Those contributions then grow tax free. The main advantage of the Roth 401(k), though, comes into play in retirement—the investment earnings are not taxed when you withdraw your money during retirement. With your regular pre-tax account, you'll be paying whatever income tax rate applies at the time you make withdrawals. Another benefit is that the Roth 401(k) is available to everyone, regardless of income level (the Roth IRA phases out eligibility starting at $ for single filers and $ if you are married filing jointly). |
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| The same annual contribution limits for defined-contribution plans currently in place ($ for /, plus $ if you're older than 50) apply to Roth 401(k) contributions. Therefore, you cannot contribute more than the maximum for all your 401(k) contributions combined, including both pre-tax and Roth 401(k) contributions. |
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| So that begs the question, to which bucket should you contribute? |
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| For both types of contributions, you are essentially assessing a trade-off between an up-front tax benefit and a post-retirement benefit. That analysis varies based on your current tax situation, expected future tax rate, time until retirement, and other factors. Generally speaking, if you expect your tax rate to remain the same or be higher in the future, the Roth 401(k) may be the preferred choice. Some financial planners suggest splitting your contributions between the contribution types, to hedge your bets. Of course, it's always a good idea to take counsel from your own financial advisors and accountants before making any decision. |
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