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Decisions, Decisions
Should You invest in a Roth 401(k) or Pre-tax 401(k)? Or Both?
By Barbara Trombley, CPA, MBA
Many employees are faced with the decision about whether to invest a portion of their paycheck in a Roth
401(k) or traditional 401(k). What is the differ- ence and what are the implications?
depending upon what bracket you are in. The Roth 401(k) does not offer tax benefits
now. Contributions are made with after-tax money. Any growth on the funds is never taxed as long as the account has been held for at least
get the tax benefits now. For example, if you are single and have taxable income over $215,951, incremental income is taxed at 35%. Your con- tributions to a traditional 401(k) plan could save you $350 on every $1000 contribution. The flip- side of this strategy is that, in retirement, all with- drawals are taxed as ordinary income.
Additionally, investors in traditional retire- ment plans need to take required minimum distributions beginning at age 72. Even if the retiree does not ‘need’ the funds, the govern- ment is ready to begin collecting its taxes on
the funds that were deferred in the plan. As
the retiree ages, the RMD factors increase, usu- ally resulting in larger distributions. A young employee now that continually contributes to a traditional retirement plan, may have a large bal- ance later in life. When it is time to take RMD’s if the account hasn’t been tapped previously, the amount to withdraw may be rather large, result- ing in a big tax bill.
A Roth 401(k) is subject to the same RMD requirement as the traditional 401k. If the Roth 401k is rolled over into a Roth IRA, then RMD’s are not required to be taken. The funds can be used or held at the individual’s discretion, giving
Roth
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“If you are single and have taxable income over $215,951, incremental income is taxed at 35%. Your contributions to a traditional 401(k) plan could save you $350 on every $1000 contribution. The flipside of this strategy is that, in retire- ment, all withdrawals are taxed as ordinary income.”
First, most plans now offer both options. If your plan does not, it may be as simple as asking the plan provider if both options can be offered. One major difference between the two is how they are taxed. The traditional 401(k) gives tax benefits now. The employee can deduct their contributions from their taxes now — up to $20,500 if you are under age 50 and up to $27,000 if over. This can save thousands on your tax bill,
five years, the distribution is qualified, and you take the distribution(s) after age 59 1⁄2. The investment choices are usually the same as the traditional 401(k) and many people contribute to both.
What option is best for you? Usually, it comes down to your personal tax situation. If you are in a very high tax bracket now and expect to be in a lower bracket at retirement, it may make sense to
You Worked Hard to Save for Retirement.
Now What?
Barbara Trombley, Financial Advisor, CPA
Mike Trombley, Financial Advisor, Former MLB Player
Since 1965
Call or visit our website
for more information:
(413) 596-6992 www.TrombleyAssociates.com
3 Retirement and Estate Planning 3 Investments
3 Social Security Review
3 Tax Strategies
Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial.
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