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Retirement Planning: Roth 401(k) and Future Taxes January 6, 2009

Posted by retirementwithaplan in retirement.
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For those that may not be aware of what a Roth is, whether it be an IRA or the newly offered 401(k) variety, in short, contributions to a Roth are done after taxes and the contributions can grow in a tax-deferred environment. (More here

ex010609_considBut now that they are available in 401(k) plans, the temptation to use them might lure the wrong people into this type of investment. Keep in mind, that for the largest majority of us, our tax rate will fall when we retire. It may not be as low as the current capital gains tax, but it will be less than what we are making when we were employed.

For many of us, the plan’s attraction may seem like you are able to keep more of your money available for times when you need it in a Roth but the same holds true in traditional IRAs and 401(k) plans, money taken out of the investment, whether taxable, subject to penalties or not, is still money not working for your future. Even the smallest hiccup, and I am not referring to a market downturn, can have long range implications on potential future earnings.

You can use this check list for deciding whether to even consider opening a Roth 401(k).

1. Is your current retirement account balance, even after the recent downturn greater than $750,000. If it is and you plan on continuing to work for quite awhile longer, you might get with your tax person and discuss the merits of the move. You will pay taxes now but if your primary concern is your heirs (not your spouse), then it might be worth a look. It could save them a great deal especially if the account does well.

2. You are making the maximum contribution. If this is the case, you might consider what your daily needed income would be as you will probably be thrown in a higher tax bracket. But most of us need that tax advantage and as attractive as a Roth might appear, the savings on a year-over-year basis could save upwards of $5,000 in income taxes.

3. You are afraid of the tax risk. Good for you. Most of us a concerned with saving enough to have a taxable consideration when we retire, making the funds last until we die, and let the heirs fight it among themselves after we are gone. But if you have a legitimate tax concern, getting with a tax consultant is best. These plans are taxable events and need the very best in advice you can afford.



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