Roth 401K: Tax Me Now
Our company recently changed 401K providers which offered me the opportunity to evaluate not only the standard 401K but also the Roth 401K. I had read about the Roth 401K back in December of 2007 and was pleased to see that these options were beginning to work their way into employers’ offerings.
It also created a new decision that I had not encountered before. Do I invest my 401K contributions into a standard 401K and take the immediate benefit of the income tax deduction? or do I allocate my contributions into Roth 401K where I pay income tax on my contributions but am able to access the money tax-free in retirement?
After talking with my investment advisor (who I highly recommend- let me know if you’d like his information by emailing me) he convinced me to put a portion of my monthly contribution into each so that I would have two buckets to play with when I hit retirement.
If you’re coming across a similar decision in the future I’d encourage you to read this article which explains the 401k & the Roth provision as well as talk with your financial advisor.
Posted: August 18th, 2008 under Investing, Personal Finance, Taxes.
Tags: 401K, Investing, retirement, roth, Roth 401K
Comment from Gamato
Time August 18, 2008 at 9:01 am
There are two very important factors when determining which of the two options one should be contributing to: 1. Current Age and 2. Expected income during retirment. Current age is important because you may be many years from retirement, and tax brackets can change numerous times between now and then. This uncertainty makes it very difficult to determine exactly which type of contribution is best for you. Because of this, if you are 10+ years from retirement, it’s probably best to split contributions equally between the Roth and Traditional so you have two options at retirement.
If you are less than 10 years from retirement, you then need to look at your expected retirement income. If it is going to be considerably less than your current income, then you would want to invest in the traditional. Bypass the taxes now, and take the hit when you are earning less money.