Planning Briefs

The Roth 401(k): It's Not A No-Brainer!

Published Thursday, December 17, 2009 at: 7:00 AM EST

Employers are beginning to adapt a relatively new kind of retirement plan: a Roth 401(k). Unlike a normal 401(k) funded with pre-tax dollars, a Roth 401(k) uses after-tax contributions but provides tax-free distributions during retirement.

Although you can put a total of as much as $18,000 into a 401(k), in 2017, and an additional $6,000 if you’re over age 50, if your company offers both traditional and Roth versions, you’ll have to decide whether to contribute to one or both, and how much.

If you’re just starting out, the Roth 401(k) could be appealing. Investment earnings compound free of taxes, just as in a traditional plan, and it could be an advantage to pay taxes on the money now, when you may be in a lower tax bracket.

However, because you’re taxed on the salary deferral that funds a Roth 401(k), you’ll take home decidedly less than if you were putting the money into a traditional 401(k). And your higher reported income could put you above the ceiling for child tax credits and other current tax breaks.

Moreover, your employer may have different rules for matching your contributions to a Roth 401(k), and the investment opportunities may not be the same. If your company offers this new type of retirement plan, we can help you weigh your options and decide how to maximize your benefits.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).