Is the New Roth 401(k) Right for You?

Most workers today understand that the retirement landscape is changing rapidly, and that it is important to keep up with the ever changing world of saving and investing for retirement. The 401(k) program has helped many workers who are not covered by traditional pension plans secure their financial future, and the new Roth 401(k) is expected to do the same.

Those investors who are familiar with the Roth IRA will find the Roth 401(k) quite easy to understand, and the concept behind both programs is the same. As with a Roth IRA, investors in a Roth 401(k) forgo current tax reduction for the promise of tax free growth and tax free withdrawals in retirement. It is important, therefore, for each individual investor to assess not only his or her current tax rate but the expected tax rate in retirement.

This is of course impossible to gauge precisely, but those workers with a high asset base and a great deal of savings could well find themselves in a higher tax bracket when they retire than during their working years. Many people assume that their tax rate will be lower in retirement, but that is not always the case.

When considering whether a Roth 401(k) is the right choice for you, it is important to note that not every employer who offers a 401(k) plan will offer the Roth option, and therefore your decision may be made for you. For those workers who do have the option, however, it is important to assess the risks and the benefits of moving some of all 401(k) contributions to the Roth 401(k).

One good exercise is to assess the tax impact such a move would have. When a worker invests in a regular 401(k), the money invested is not subject to tax. Moving to a Roth 401(k) would mean those contributions would be taxed, resulting in a higher tax bill. It is a good idea to run the numbers and determine if paying the extra taxes on the front end makes sense.

While some workers will be comfortable making this decision on their own, others may want to seek out the advice of an accountant or tax professional. These financial professionals can provide valuable advice. If you have an ongoing relationship with a financial professional it may be a good idea to sit down and run the numbers together.

Deciding to invest in a Roth 401(k) as opposed to the traditional savings vehicle is not a decision to be taken lightly, and there is no one right answer for every investor. It is important to assess your own situation in order to decide if a Roth 401(k) is the right choice for you.

Related Posts:

Leave a Comment