At Work

Time for a Roth?

Remember, always save enough to receive full employer match. Even if you use a Roth 401k, any emp,over match and earnings on that match are considered traditional 401k Money and are taxed as income upon withdrawal.

For more info check here.

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2 replies »

  1. The Roth 401K was not available when I first started my 401K. I read the linked article and he points out that if you think that you will be in a higher tax bracket, the Roth is better, which is basically true.

    I could not guess what tax bracket I would have been after 40 years of working. I don’t think most people cannot choice their retirement tax bracket. Most people cannot tell you their current tax bracket.

    I did know, I had to contribute at least maximize the company match or I was giving up free money.

    If I really wanted to save on taxes, I should have invested more outside of my 401K because the capital gains tax is usually less assuming that you made enough to invest into the market. In that case then you are probably making enough to be above the 15% ordinary tax bracket. It took my 30 years to figure out the market, but it was a scary learning curve. Also, if I could afford to invest outside of my 401K, then the Roth 401K would be the better choice.

    The author also pointed out that if you can’t contribute enough money for the company match in a Roth 401K, then the traditional 401K with the tax deferral will give you some extra money to add to the traditional 401K to help meet the company match. The importance of this cannot be understated. If it was not for the tax derral, I would have not been able to save with newborns in the house nor at the end of my career, being able to save 15% maxing out my tax free benefit.

    I think for young people that are not starting out in the boardroom, that the most important thing is to save as much as they can and deal with the taxes later. If you saved so much and have earned so much that taxes are a problem, there are ways to deal with that. Missing out on years of compounding in your 401K cannot be fixed in retirement.

    Explaining tax options gives people too choices for the unknown and most people will do nothing out fear of being wrong and will do nothing. They don’t understand that doing nothing and not saving is far worse than picking the wrong plan.

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    • You’re right, guessing about the future is nearly impossible. However, there are factors resent today that indicate only higher taxes in the years ahead. Also, anyone subject to the required minimum distributions at 70-1/2 will most likely find themselves bumped into a higher bracket

      Like

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