My wife and I are both 54 years old, and we each earn a six-figure salary. We are currently maximizing our contributions to our employers’ traditional 401(k) plans. Does it make sense for us to contribute to a Roth 401(k)? Yes. You are in an ideal situation to benefit from investing some or all of your future 401(k) contributions in a Roth 401(k) -- if the option is offered by your employer -- particularly because your income is too high to contribute to a Roth IRA. (You’re eligible to contribute to a Roth IRA only if joint income is less than $191,000 in 2014.) Roth contributions don’t reduce your tax bill now, but you can withdraw all of the money in the account tax-free after you reach age 59½ and have had the account for at least five years. Traditional 401(k) contributions, on the other hand, lower your taxable income now but are taxable when withdrawn. If most of your contributions so far have been to a traditional 401(k), contributing some money to a Roth 401(k) can be a great way to diversify your tax situation in retirement. “It gives most people more flexibility in retirement,” says Stuart Ritter, a certified financial planner with T. Rowe Price. If you need to take a lump sum withdrawal -- whether for travel, a retirement house or medical expenses -- you can tap the Roth without any tax consequences. But if you take a lump sum from a traditional 401(k) or traditional IRA, says Ritter, “you’ll have to take more than you actually need since you’ll pay part of the withdrawal in taxes.” Withdrawals from traditional retirement accounts also boost your adjusted gross income, which has a ripple effect. “The entire amount from the traditional 401(k) is included in your AGI, which can then push you into a higher tax bracket, increase your Medicare premium and subject more of your Social Security benefits to taxes,” says Ritter. Withdrawals from Roth 401(k)s and Roth IRAs, on the other hand, aren’t included in your AGI. If you expect your tax rate to drop ten percentage points or more in retirement and you’re over age 50, then contributing to the traditional 401(k) could provide more spendable income in retirement, says Ritter. “But even if the traditional 401(k) gives you a bit more spendable income, the diversification and flexibility offered by the Roth might still make that the more compelling choice.” Read more at http://www.kiplinger.com/article/sa...ts-of-the-roth-401-k.html#jltYgWITzaLzmgqO.99
I guess with a joint income it is more than likely you can qualify for the Roth 401k. I do not have a significant other so I cannot have a joint income to share. I wish that I had full-time job income to enjoy getting to retirement.
Currently my company has a traditional 401(k) but i do have influence on the choice. Would you suggest we offer the Roth IRA also or instead of the traditional 401?
I'd say yes. The employee can chose either one or a combo of the 2 up to the max contribution limit. One with pretax dollars that defers taxes until retirement and lowers current taxable income, and the other that grows tax-free with after-tax dollars.
Thanks JR I know we are up for another review within the next 6 months, so I will bring this idea up when we meet with our financial advisor.
This is good information. This will help those out there make a better decision about their choice of an IRA. Its good to know which would benefit my level of income better.
I always had a 403b. However, when I decided to leave teaching at the public schools, I chose to begin a Roth IRA. I knew that I would not fully retire at age 55. I always believed I would start another career after retiring. I just always thought that I would have an employer who would also make matching contributions. Currently, there are few employers in my are who make contributions. I was always told that one should think of retirement as a three tiered stool. One leg was Social Security. The second leg was your personal savings. The third leg was your pension. Well now, I am slowly but surely working on a fourth leg. I need a fourth leg because the costs of my retirement package's health insurance has skyrocketed. Just a few years ago there was about $100.00 out of pocket are now over $900.00 which does not include the $800.00 deductible. Those are reasons why I may need more money than anticipated in retirement.
I just recently entered the workforce as a college graduate and I'm amazed by how many folks I work with who do not invest in our employer's 401(k) plan. The day I was hired I signed up for the Roth 401(k) but now I'm not sure if I should stick with it. Can someone please better explain the benefits and drawbacks between Roth, Pre-tax, and After-tax plans to me? My company didn't detail them or compare each one enough for me to get a full picture.
It's great that you're starting early and not waiting until you're in your 50's like too many. A main reason why so few people are wealthy is because too many don't invest and too many don't invest very much money and don't start early enough. The Roth 401k will grow tax free, since it is invested with after tax dollars. The traditional 401k will be tax-deferred - you will have to pay taxes on that money, but not until you retire and start drawing the money out. You will have to start pulling a minimum amount out each year by a certain age and start paying taxes on that amount withdrawn. A good article: http://www.forbes.com/sites/ashleaebeling/2014/08/19/employees-are-falling-for-roth-401ks/ "Some good reasons to go Roth: if you expect your tax rates to be higher in retirement; if you’re young and have decades of tax-free compounding earnings potential; if you plan to leave your Roth to a spouse or heirs who can stretch out the tax-free growth. The decision is much like choosing between a traditional Individual Retirement Account and a Roth IRA, only you don’t have to worry about the pesky income limitations for contributing to a Roth IRA"
