Taking Advantage of a Roth 401(k)

Since 2006, 401(k) plans have been able to offer a Roth feature, which blends some of the best features of traditional 401(k) plans with Roth IRAs. Although these plans have been around for a while, some employers have only started adding it to their plans in recent years. If available to you, this option could significantly impact your retirement savings.

Roth contributions are particularly attractive to younger people who are early in their career and anticipate being in higher tax brackets later in life. This is because contributions to a Roth 401(k) are made with after-tax money. Taxes are paid now on the contributions, but distributions (including the growth) are treated as tax-free as long as they are taken after turning age 59 ½.

High wage earners might also be attracted to a Roth 401(k) because their income could be too high to contribute to a Roth IRA. These income limitations for Roth IRA contributions do not apply to a Roth 401(k), so for many high earners, this is the only way to get access to a Roth.

Roth 401(k) Strategy

Since it is hard to know for sure what overall tax rates will be in the future or which tax bracket you might find yourself down the road, it might make sense to make dual contributions, splitting your contributions between pre-tax and after-tax, which is allowed by most plans. At the very least, this will give you tax flexibility in your retirement years.

We encourage you to check with your employer to see if a Roth 401(k) option is available in your retirement plan. If not, expressing interest in a Roth 401(k) to your employer could encourage them to add it in the future.

Call us today to find out about your options for setting up a tax-deferred account, so you can take advantage of the power time has on your investments in order to comfortably enjoy your retirement.

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